Are Dividend Investors Making A Mistake With CLIO Cosmetics Co.,Ltd (KOSDAQ:237880)?

Dividend paying stocks like CLIO Cosmetics Co.,Ltd (KOSDAQ:237880) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

Some readers mightn't know much about CLIO CosmeticsLtd's 1.2% dividend, as it has only been paying distributions for the last three years. While it may not look like much, if earnings are growing it could become quite interesting. During the year, the company also conducted a buyback equivalent to around 1.0% of its market capitalisation. Some simple analysis can reduce the risk of holding CLIO CosmeticsLtd for its dividend, and we'll focus on the most important aspects below.

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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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 79% of CLIO CosmeticsLtd's profits were paid out as dividends in the last 12 months. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. CLIO CosmeticsLtd's cash payout ratio in the last year was 25%, which suggests dividends were well covered by cash generated by the business. It's positive to see that CLIO CosmeticsLtd's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

With a strong net cash balance, CLIO CosmeticsLtd investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on CLIO CosmeticsLtd'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. It has only been paying dividends for a few short years, and the dividend has already been cut at least once. This is one income stream we're not ready to live on. During the past three-year period, the first annual payment was ₩100 in 2018, compared to ₩220 last year. This works out to be a compound annual growth rate (CAGR) of approximately 30% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

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

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though CLIO CosmeticsLtd's EPS have declined at around 26% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and CLIO CosmeticsLtd's earnings per share, which support the dividend, have been anything but stable.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. CLIO CosmeticsLtd's payout ratios are within a normal range for the average corporation, and we like that its cashflow was stronger than reported profits. Earnings per share are down, and CLIO CosmeticsLtd's dividend has been cut at least once in the past, which is disappointing. In sum, we find it hard to get excited about CLIO CosmeticsLtd from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 1 warning sign for CLIO CosmeticsLtd that investors need to be conscious of moving forward.

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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