How Does CTK Cosmetics Co., Ltd (KOSDAQ:260930) Fare As A Dividend Stock?

Today we'll take a closer look at CTK Cosmetics Co., Ltd (KOSDAQ:260930) 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. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

Some readers mightn't know much about CTK Cosmetics's 1.9% dividend, as it has only been paying distributions for the last two years. A low dividend might not be a bad thing, if the company is reinvesting heavily and growing its sales and profits. The company also bought back stock equivalent to around 1.2% of market capitalisation this year. Some simple analysis can reduce the risk of holding CTK Cosmetics for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on CTK Cosmetics!

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. CTK Cosmetics paid out 481% of its profit as dividends, over the trailing twelve month period. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Unfortunately, while CTK Cosmetics pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

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

We update our data on CTK Cosmetics every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. During the past two-year period, the first annual payment was ₩200 in 2019, compared to ₩300 last year. Dividends per share have grown at approximately 22% per year over this time.

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

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. CTK Cosmetics' earnings per share have shrunk at 55% 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 CTK Cosmetics' earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that CTK Cosmetics' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. CTK Cosmetics paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Earnings per share are down, and to our mind CTK Cosmetics has not been paying a dividend long enough to demonstrate its resilience across economic cycles. Using these criteria, CTK Cosmetics looks quite suboptimal from a dividend investment perspective.

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. Case in point: We've spotted 4 warning signs for CTK Cosmetics (of which 1 doesn't sit too well with us!) you should know about.

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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