Are Dividend Investors Getting More Than They Bargained For With Monami Co., Ltd.'s (KRX:005360) Dividend?

Is Monami Co., Ltd. (KRX:005360) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

Some readers mightn't know much about Monami's 1.2% dividend, as it has only been paying distributions for a year or so. Some simple analysis can reduce the risk of holding Monami for its dividend, and we'll focus on the most important aspects below.

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Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Although it reported a loss over the past 12 months, Monami currently pays a dividend. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Monami paid out 196% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term.

We update our data on Monami every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. This company has been paying a dividend for less than 2 years, which we think is too soon to consider it a reliable dividend stock. Its most recent annual dividend was ₩70.0 per share.

Modest dividend growth is good to see, especially with the payments being relatively stable. However, the payment history is relatively short and we wouldn't want to rely on this dividend too much.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Over the past five years, it looks as though Monami's EPS have declined at around 61% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Monami's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Monami's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with Monami paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Earnings per share are down, and to our mind Monami has not been paying a dividend long enough to demonstrate its resilience across economic cycles. Using these criteria, Monami looks quite suboptimal from a dividend investment perspective.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come accross 4 warning signs for Monami you should be aware of, and 2 of them make us uncomfortable.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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