Read This Before Buying REYON Pharmaceutical Co., Ltd. (KRX:102460) For Its Dividend

Today we'll take a closer look at REYON Pharmaceutical Co., Ltd. (KRX:102460) 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. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

REYON Pharmaceutical has only been paying a dividend for a year or so, so investors might be curious about its 1.7% yield. There are a few simple ways to reduce the risks of buying REYON Pharmaceutical for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on REYON Pharmaceutical!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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. REYON Pharmaceutical paid out 213% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Last year, REYON Pharmaceutical paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

We update our data on REYON 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. With a payment history of less than 2 years, we think it's a bit too soon to think about living on the income from its dividend. This works out to a decline of approximately 30% over that time.

We struggle to make a case for buying REYON Pharmaceutical for its dividend, given that payments have shrunk over the past one years.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. REYON Pharmaceutical's earnings per share have shrunk at 24% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

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. REYON Pharmaceutical paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Earnings per share are down, and to our mind REYON 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 REYON 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. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, REYON Pharmaceutical has 5 warning signs (and 2 which shouldn't be ignored) we think you should know about.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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