Should Income Investors Look At Chokwang Paint Co., Ltd. (KRX:004910) Before Its Ex-Dividend?

It looks like Chokwang Paint Co., Ltd. (KRX:004910) is about to go ex-dividend in the next four days. If you purchase the stock on or after the 29th of December, you won't be eligible to receive this dividend, when it is paid on the 7th of April.

Chokwang Paint's next dividend payment will be ₩200 per share, on the back of last year when the company paid a total of ₩200 to shareholders. Last year's total dividend payments show that Chokwang Paint has a trailing yield of 3.1% on the current share price of ₩6430. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Chokwang Paint

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Chokwang Paint paid out a comfortable 33% of its profit last year. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The company paid out 107% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Chokwang Paint paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Chokwang Paint's ability to maintain its dividend.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by Chokwang Paint's 17% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Chokwang Paint has delivered 2.9% dividend growth per year on average over the past 10 years.

The Bottom Line

Is Chokwang Paint worth buying for its dividend? Chokwang Paint's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. Bottom line: Chokwang Paint has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Chokwang Paint don't faze you, it's worth being mindful of the risks involved with this business. We've identified 4 warning signs with Chokwang Paint (at least 2 which make us uncomfortable), and understanding them should be part of your investment process.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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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