Here's Why We're Wary Of Buying Tongyang's (KRX:001520) For Its Upcoming Dividend

It looks like Tongyang Inc. (KRX:001520) is about to go 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 14th of April.

Tongyang's next dividend payment will be ₩40.00 per share. Last year, in total, the company distributed ₩40.00 to shareholders. Last year's total dividend payments show that Tongyang has a trailing yield of 3.4% on the current share price of ₩1190. If you buy this business for its dividend, you should have an idea of whether Tongyang's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Tongyang

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. Tongyang distributed an unsustainably high 136% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out an unsustainably high 202% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

Tongyang does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Cash is slightly more important than profit from a dividend perspective, but given Tongyang's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see how much of its profit Tongyang 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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Tongyang's earnings per share have plummeted approximately 58% a year over the previous five years.

Unfortunately Tongyang has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.

The Bottom Line

Has Tongyang got what it takes to maintain its dividend payments? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (136%) and cash flow as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not that we think Tongyang is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Tongyang as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 2 warning signs for Tongyang that we recommend you consider before investing in the business.

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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