Do Investors Have Good Reason To Be Wary Of Hanatour Service Inc.'s (KRX:039130) 1.8% Dividend Yield?

Dividend paying stocks like Hanatour Service Inc. (KRX:039130) 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. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

While Hanatour Service's 1.8% dividend yield is not the highest, we think its lengthy payment history is quite interesting. Some simple analysis can reduce the risk of holding Hanatour Service for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Hanatour Service!

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. Although it reported a loss over the past 12 months, Hanatour Service 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.

Unfortunately, while Hanatour Service pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

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

Consider getting our latest analysis on Hanatour Service's financial position 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. For the purpose of this article, we only scrutinise the last decade of Hanatour Service's dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was ₩500 in 2010, compared to ₩800 last year. Dividends per share have grown at approximately 4.8% per year over this time. Hanatour Service's dividend payments have fluctuated, so it hasn't grown 4.8% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

It's good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We're not that enthused by this.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Hanatour Service's EPS have fallen by approximately 62% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Hanatour Service's earnings per share, which support the dividend, have been anything but stable.

We'd also point out that Hanatour Service issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

Conclusion

To summarise, shareholders should always check that Hanatour Service's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Hanatour Service's dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Earnings per share are down, and Hanatour Service's dividend has been cut at least once in the past, which is disappointing. Using these criteria, Hanatour Service looks quite suboptimal from a dividend investment perspective.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come accross 3 warning signs for Hanatour Service you should be aware of, and 2 of them are potentially serious.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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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