Something To Consider Before Buying Hironic Co., Ltd. (KOSDAQ:149980) For The 1.0% Dividend

Today we'll take a closer look at Hironic Co., Ltd. (KOSDAQ:149980) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

Hironic has only been paying a dividend for a year or so, so investors might be curious about its 1.0% yield. The company also bought back stock during the year, equivalent to approximately 1.4% of the company's market capitalisation at the time. That said, the recent jump in the share price will make Hironic's dividend yield look smaller, even though the company prospects could be improving. Some simple analysis can reduce the risk of holding Hironic for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Hironic!

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. Hironic paid out 104% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Last year, Hironic paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

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

We update our data on Hironic every 24 hours, so you can always get our latest analysis of its financial health, 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. This company has been paying a dividend for less than 2 years, which we think is too soon to consider it a reliable dividend stock. Last year's dividends were more than 600% higher than the payment one years ago.

The dividend has been growing pretty quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.

Dividend Growth Potential

The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient's purchasing power. Hironic's earnings per share have shrunk at 38% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Hironic's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Hironic'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 Hironic paying out a high percentage of both its cashflow and earnings. Earnings per share are down, and to our mind Hironic has not been paying a dividend long enough to demonstrate its resilience across economic cycles. In this analysis, Hironic doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 5 warning signs for Hironic (1 makes us a bit uncomfortable!) that you should be aware of before investing.

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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