Lotte Chilsung Beverage Co.,Ltd. (KRX:005300) Investors Should Think About This Before Buying It For Its Dividend

Could Lotte Chilsung Beverage Co.,Ltd. (KRX:005300) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the 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.

A slim 2.2% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Lotte Chilsung BeverageLtd could have potential. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. While Lotte Chilsung BeverageLtd 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.

Lotte Chilsung BeverageLtd paid out 288% 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.

We update our data on Lotte Chilsung BeverageLtd 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. For the purpose of this article, we only scrutinise the last decade of Lotte Chilsung BeverageLtd's dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was ₩250 in 2011, compared to ₩2.7k last year. Dividends per share have grown at approximately 27% per year over this time. Lotte Chilsung BeverageLtd's dividend payments have fluctuated, so it hasn't grown 27% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

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? Lotte Chilsung BeverageLtd has grown its earnings per share at 6.0% per annum over the past five years. It's good to see decent earnings growth and a low payout ratio. Companies with these characteristics often display the fastest dividend growth over the long term - assuming earnings can be maintained, of course.

Conclusion

To summarise, shareholders should always check that Lotte Chilsung BeverageLtd'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 Lotte Chilsung BeverageLtd paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. Using these criteria, Lotte Chilsung BeverageLtd looks quite suboptimal from a dividend investment perspective.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come accross 3 warning signs for Lotte Chilsung BeverageLtd you should be aware of, and 1 of them is significant.

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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