Should Mecaro Co., Ltd. (KOSDAQ:241770) Be Part Of Your Income Portfolio?

Today we'll take a closer look at Mecaro Co., Ltd. (KOSDAQ:241770) 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 your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

Mecaro has only been paying a dividend for a year or so, so investors might be curious about its 1.1% yield. The company also bought back stock during the year, equivalent to approximately 0.9% of the company's market capitalisation at the time. Some simple research can reduce the risk of buying Mecaro for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Mecaro!

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. While Mecaro pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Last year, Mecaro paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

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

Consider getting our latest analysis on Mecaro's financial position here.

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. This company has been paying a dividend for less than 2 years, which we think is too soon to consider it a reliable dividend stock. As we can see, dividend payments have fallen heavily from where they were one years ago.

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

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. Mecaro's EPS have fallen by approximately 96% per year during the past three years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Mecaro'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. Mecaro's dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Earnings per share have been falling, and the company has a relatively short dividend history - shorter than we like, anyway. In this analysis, Mecaro doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Mecaro has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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