Here's Why We're Wary Of Buying Hanil Iron & Steel's (KRX:002220) For Its Upcoming Dividend

It looks like Hanil Iron & Steel Co., Ltd (KRX:002220) is about to go ex-dividend in the next 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Hanil Iron & Steel investors that purchase the stock on or after the 27th of December will not receive the dividend, which will be paid on the 14th of April.

The company's next dividend payment will be ₩30.00 per share, on the back of last year when the company paid a total of ₩30.00 to shareholders. Calculating the last year's worth of payments shows that Hanil Iron & Steel has a trailing yield of 1.6% on the current share price of ₩1923.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Hanil Iron & Steel

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Hanil Iron & Steel reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If Hanil Iron & Steel didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Hanil Iron & Steel paid out more free cash flow than it generated - 124%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Click here to see how much of its profit Hanil Iron & Steel 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Hanil Iron & Steel reported a loss last year, but at least the general trend suggests its income has been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Hanil Iron & Steel has seen its dividend decline 16% per annum on average over the past three years, which is not great to see.

We update our analysis on Hanil Iron & Steel every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

Should investors buy Hanil Iron & Steel for the upcoming dividend? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Hanil Iron & Steel.

With that being said, if you're still considering Hanil Iron & Steel as an investment, you'll find it beneficial to know what risks this stock is facing. Be aware that Hanil Iron & Steel is showing 3 warning signs in our investment analysis, and 2 of those are potentially serious...

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.