Is FarmStory Co., Ltd. (KOSDAQ:027710) At Risk Of Cutting Its Dividend?

Is FarmStory Co., Ltd. (KOSDAQ:027710) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

While FarmStory's 1.7% dividend yield is not the highest, we think its lengthy payment history is quite interesting. Remember though, due to the recent spike in its share price, FarmStory's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. There are a few simple ways to reduce the risks of buying FarmStory for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on FarmStory!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. While FarmStory pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Unfortunately, while FarmStory 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.

Consider getting our latest analysis on FarmStory's financial position 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. FarmStory 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 ₩50.0 in 2011, compared to ₩25.0 last year. The dividend has shrunk at around 6.7% a year during that period.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

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. FarmStory's EPS have fallen by approximately 32% 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 FarmStory's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that FarmStory's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. FarmStory's dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Second, earnings per share have actually shrunk, but at least the dividends have been relatively stable. There are a few too many issues for us to get comfortable with FarmStory from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 3 warning signs for FarmStory (of which 2 can't be ignored!) you should know about.

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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