Why It Might Not Make Sense To Buy Lotte Chilsung Beverage Co.,Ltd. (KRX:005300) For Its Upcoming Dividend

Lotte Chilsung Beverage Co.,Ltd. (KRX:005300) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 29th of December to receive the dividend, which will be paid on the 24th of April.

Lotte Chilsung BeverageLtd's next dividend payment will be ₩2,700 per share, on the back of last year when the company paid a total of ₩2,700 to shareholders. Calculating the last year's worth of payments shows that Lotte Chilsung BeverageLtd has a trailing yield of 2.4% on the current share price of ₩111500. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Lotte Chilsung BeverageLtd

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Lotte Chilsung BeverageLtd reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out an unsustainably high 288% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Lotte Chilsung BeverageLtd is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Lotte Chilsung BeverageLtd was unprofitable last year, but at least the general trend suggests its earnings have been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Lotte Chilsung BeverageLtd has delivered an average of 27% per year annual increase in its dividend, based on the past 10 years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Remember, you can always get a snapshot of Lotte Chilsung BeverageLtd's financial health, by checking our visualisation of its financial health, here.

To Sum It Up

Has Lotte Chilsung BeverageLtd got what it takes to maintain its dividend payments? First, it's not great to see the company paying a dividend despite being loss-making over the last year. Second, the dividend was not well covered by cash flow." It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that being said, if you're still considering Lotte Chilsung BeverageLtd as an investment, you'll find it beneficial to know what risks this stock is facing. We've identified 3 warning signs with Lotte Chilsung BeverageLtd (at least 1 which is concerning), and understanding them should be part of your investment process.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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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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