Do Investors Have Good Reason To Be Wary Of Woongjin Thinkbig Co., Ltd.'s (KRX:095720) 2.9% Dividend Yield?

Today we'll take a closer look at Woongjin Thinkbig Co., Ltd. (KRX:095720) 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. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

A 2.9% yield is nothing to get excited about, but investors probably think the long payment history suggests Woongjin Thinkbig has some staying power. Some simple research can reduce the risk of buying Woongjin Thinkbig for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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. Although Woongjin Thinkbig pays a dividend, it was loss-making during the past year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Woongjin Thinkbig paid out 598% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term.

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

Remember, you can always get a snapshot of Woongjin Thinkbig's latest financial position, by checking our visualisation of its financial health.

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. Woongjin Thinkbig has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was ₩1.1k in 2011, compared to ₩80.0 last year. The dividend has fallen 93% over that period.

We struggle to make a case for buying Woongjin Thinkbig for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Woongjin Thinkbig's EPS have fallen by approximately 41% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Woongjin Thinkbig's earnings per share, which support the dividend, have been anything but stable.

We'd also point out that Woongjin Thinkbig issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're a bit uncomfortable with Woongjin Thinkbig paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Earnings per share are down, and Woongjin Thinkbig's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with Woongjin Thinkbig from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 1 warning sign for Woongjin Thinkbig that investors should know about before committing capital to this stock.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

When trading Woongjin Thinkbig or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.