Are Dividend Investors Making A Mistake With Ahn-Gook Pharmaceutical Co., Ltd. (KOSDAQ:001540)?

Dividend paying stocks like Ahn-Gook Pharmaceutical Co., Ltd. (KOSDAQ:001540) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. 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.

Investors might not know much about Ahn-Gook Pharmaceutical's dividend prospects, even though it has been paying dividends for the last eight years and offers a 1.7% yield. While the yield may not look too great, the relatively long payment history is interesting. During the year, the company also conducted a buyback equivalent to around 0.8% of its market capitalisation. There are a few simple ways to reduce the risks of buying Ahn-Gook Pharmaceutical for its dividend, and we'll go through these below.

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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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although it reported a loss over the past 12 months, Ahn-Gook Pharmaceutical currently pays a dividend. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Unfortunately, while Ahn-Gook Pharmaceutical pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

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

We update our data on Ahn-Gook Pharmaceutical every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Looking at the last decade of data, we can see that Ahn-Gook Pharmaceutical paid its first dividend at least eight years ago. Its dividend has not fluctuated much that time, which we like, but we're conscious that the company might not yet have a track record of maintaining dividends in all economic conditions. During the past eight-year period, the first annual payment was ₩123 in 2013, compared to ₩220 last year. Dividends per share have grown at approximately 7.6% per year over this time.

The dividend has been growing at a reasonable rate, which we like. We're conscious though that one of the best ways to detect a multi-decade consistent dividend-payer, is to watch a company pay dividends for 20 years - a distinction Ahn-Gook Pharmaceutical has not achieved yet.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Ahn-Gook Pharmaceutical's earnings per share have shrunk at 12% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Ahn-Gook Pharmaceutical's earnings per share, which support the dividend, have been anything but stable.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. It's a concern to see that the company paid a dividend despite reporting a loss, and the dividend was also not well covered by free cash flow. Earnings per share are down, and to our mind Ahn-Gook Pharmaceutical has not been paying a dividend long enough to demonstrate its resilience across economic cycles. There are a few too many issues for us to get comfortable with Ahn-Gook Pharmaceutical 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. To that end, Ahn-Gook Pharmaceutical has 2 warning signs (and 1 which is potentially serious) we think you should know about.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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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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