Read This Before Buying Ilshin Spinning Co., Ltd (KRX:003200) For Its Dividend

Dividend paying stocks like Ilshin Spinning Co., Ltd (KRX:003200) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

A 1.7% yield is nothing to get excited about, but investors probably think the long payment history suggests Ilshin Spinning has some staying power. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

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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. Ilshin Spinning paid out 116% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Ilshin Spinning paid out 153% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. Cash is slightly more important than profit from a dividend perspective, but given Ilshin Spinning's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

With a strong net cash balance, Ilshin Spinning investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Ilshin Spinning's financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Ilshin Spinning has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This company's dividend has not fluctuated wildly, but its dividend per share payments have still decreased substantially over this time, which is not ideal. During the past 10-year period, the first annual payment was ₩2.5k in 2011, compared to ₩1.5k last year. This works out to be a decline of approximately 5.0% per year over that time.

We struggle to make a case for buying Ilshin Spinning for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Over the past five years, it looks as though Ilshin Spinning's EPS have declined at around 35% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Ilshin Spinning paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. It's not great to see earnings per share shrinking. The dividends have been relatively consistent, but we wonder for how much longer this will be true. In this analysis, Ilshin Spinning doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 4 warning signs for Ilshin Spinning (1 doesn't sit too well with us!) that you should be aware of before investing.

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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