Should You Buy Changhae Ethanol Co., Ltd. (KOSDAQ:004650) For Its Upcoming Dividend?

Changhae Ethanol Co., Ltd. (KOSDAQ:004650) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 29th of December will not receive the dividend, which will be paid on the 20th of April.

Changhae Ethanol's next dividend payment will be ₩600 per share. Last year, in total, the company distributed ₩600 to shareholders. Calculating the last year's worth of payments shows that Changhae Ethanol has a trailing yield of 4.3% on the current share price of ₩13950. 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 investigate whether Changhae Ethanol can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Changhae Ethanol

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. Changhae Ethanol has a low and conservative payout ratio of just 23% of its income after tax. A useful secondary check can be to evaluate whether Changhae Ethanol generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 48% of the free cash flow it generated, which is a comfortable payout ratio.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Changhae Ethanol earnings per share are up 9.9% per annum over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, five years ago, Changhae Ethanol has lifted its dividend by approximately 3.7% a year on average. 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.

The Bottom Line

Should investors buy Changhae Ethanol for the upcoming dividend? Earnings per share have been growing moderately, and Changhae Ethanol is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but Changhae Ethanol is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Changhae Ethanol, and we would prioritise taking a closer look at it.

While it's tempting to invest in Changhae Ethanol for the dividends alone, you should always be mindful of the risks involved. Our analysis shows 3 warning signs for Changhae Ethanol and you should be aware of them before buying any shares.

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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