Is It Worth Buying MegaStudy Co., Ltd. (KOSDAQ:072870) For Its 4.0% Dividend Yield?

Dividend paying stocks like MegaStudy Co., Ltd. (KOSDAQ:072870) 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. 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.

A high yield and a long history of paying dividends is an appealing combination for MegaStudy. We'd guess that plenty of investors have purchased it for the income. Some simple analysis can reduce the risk of holding MegaStudy 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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, MegaStudy paid out 35% of its profit as dividends. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. MegaStudy's cash payout ratio last year was 24%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's positive to see that MegaStudy's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

While the above analysis focuses on dividends relative to a company's earnings, we do note MegaStudy's strong net cash position, which will let it pay larger dividends for a time, should it choose.

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

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. MegaStudy has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. While its dividends have not been hugely volatile, its most recent dividend is still meaningfully below where it was 10 years ago. During the past 10-year period, the first annual payment was ₩767 in 2011, compared to ₩450 last year. The dividend has shrunk at around 5.2% a year during that period.

We struggle to make a case for buying MegaStudy 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. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see MegaStudy has grown its earnings per share at 19% per annum over the past five years. A company paying out less than a quarter of its earnings as dividends, and growing earnings at more than 10% per annum, looks to be right in the cusp of its growth phase. At the right price, we might be interested.

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. First, we like that the company's dividend payments appear well covered, although the retained capital also needs to be effectively reinvested. That said, we were glad to see it growing earnings and paying a fairly consistent dividend. All these things considered, we think this organisation has a lot going for it from a dividend 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. See if management have their own wealth at stake, by checking insider shareholdings in MegaStudy stock.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 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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