Why It Might Not Make Sense To Buy Samil Pharmaceutical Co.,Ltd (KRX:000520) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Samil Pharmaceutical Co.,Ltd (KRX:000520) is about to trade ex-dividend in the next four days. This means that investors who purchase shares on or after the 29th of December will not receive the dividend, which will be paid on the 10th of April.

Samil PharmaceuticalLtd's next dividend payment will be ₩150 per share, on the back of last year when the company paid a total of ₩150 to shareholders. Calculating the last year's worth of payments shows that Samil PharmaceuticalLtd has a trailing yield of 0.7% on the current share price of ₩20800. 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.

View our latest analysis for Samil PharmaceuticalLtd

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year, Samil PharmaceuticalLtd paid out 97% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 33% of its free cash flow in the past year.

It's good to see that while Samil PharmaceuticalLtd's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Samil PharmaceuticalLtd's earnings per share have fallen at approximately 12% a year over the previous 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. Samil PharmaceuticalLtd has seen its dividend decline 2.8% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

Has Samil PharmaceuticalLtd got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 97% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Bottom line: Samil PharmaceuticalLtd 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 Samil PharmaceuticalLtd don't faze you, it's worth being mindful of the risks involved with this business. For instance, we've identified 2 warning signs for Samil PharmaceuticalLtd (1 makes us a bit uncomfortable) you should be aware of.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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