Consider This Before Buying Kyung Dong Pharmaceutical Co., Ltd. (KOSDAQ:011040) For The 1.9% Dividend

Is Kyung Dong Pharmaceutical Co., Ltd. (KOSDAQ:011040) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

While Kyung Dong Pharmaceutical's 1.9% dividend yield is not the highest, we think its lengthy payment history is quite interesting. The company also returned around 0.5% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 91% of Kyung Dong Pharmaceutical's profits were paid out as dividends in the last 12 months. Its payout ratio is quite high, and the dividend is not well covered by earnings. If earnings are growing or the company has a large cash balance, this might be sustainable - still, we think it is a concern.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Kyung Dong Pharmaceutical paid out 102% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Cash is slightly more important than profit from a dividend perspective, but given Kyung Dong Pharmaceutical's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

With a strong net cash balance, Kyung Dong Pharmaceutical investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of Kyung Dong Pharmaceutical'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. Kyung Dong Pharmaceutical has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was ₩250 in 2011, compared to ₩200 last year. The dividend has shrunk at around 2.2% a year during that period. Kyung Dong Pharmaceutical's dividend hasn't shrunk linearly at 2.2% per annum, but the CAGR is a useful estimate of the historical rate of change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? It's not great to see that Kyung Dong Pharmaceutical's have fallen at approximately 3.4% over the past five years. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

Conclusion

To summarise, shareholders should always check that Kyung Dong Pharmaceutical's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with Kyung Dong Pharmaceutical paying out a high percentage of both its cashflow and earnings. Earnings per share are down, and Kyung Dong Pharmaceutical'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 Kyung Dong 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.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come accross 3 warning signs for Kyung Dong Pharmaceutical you should be aware of, and 1 of them is concerning.

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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