It Might Not Be A Great Idea To Buy MH Ethanol Co.,Ltd. (KRX:023150) For Its Next Dividend

MH Ethanol Co.,Ltd. (KRX:023150) stock is about to trade ex-dividend in 3 days. You will need to purchase shares before the 29th of December to receive the dividend, which will be paid on the 21st of April.

MH EthanolLtd's next dividend payment will be ₩350 per share, on the back of last year when the company paid a total of ₩350 to shareholders. Based on the last year's worth of payments, MH EthanolLtd stock has a trailing yield of around 4.1% on the current share price of ₩8530. If you buy this business for its dividend, you should have an idea of whether MH EthanolLtd's dividend is reliable and sustainable. As a result, readers should always check whether MH EthanolLtd has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for MH EthanolLtd

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. MH EthanolLtd paid out a disturbingly high 250% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Dividends consumed 54% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and MH EthanolLtd fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit MH EthanolLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see MH EthanolLtd's earnings per share have dropped 27% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Given that MH EthanolLtd has only been paying a dividend for a year, there's not much of a past history to draw insight from.

Final Takeaway

Should investors buy MH EthanolLtd for the upcoming dividend? Earnings per share have been in decline, which is not encouraging. Worse, MH EthanolLtd's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. Bottom line: MH EthanolLtd has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of MH EthanolLtd don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 5 warning signs for MH EthanolLtd (of which 2 are significant!) you should know about.

If you're in the market for dividend stocks, we recommend checking our list of top 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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