Stock Analysis

Here's Why We're Wary Of Buying SK hynix's (KRX:000660) For Its Upcoming Dividend

KOSE:A000660
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Readers hoping to buy SK hynix, Inc. (KRX:000660) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 29th of December, you won't be eligible to receive this dividend, when it is paid on the 17th of April.

SK hynix's next dividend payment will be ₩1,000 per share, and in the last 12 months, the company paid a total of ₩1,000 per share. Based on the last year's worth of payments, SK hynix stock has a trailing yield of around 0.8% on the current share price of ₩118000. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether SK hynix has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for SK hynix

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. SK hynix has a low and conservative payout ratio of just 24% of its income after tax. 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. It paid out 80% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's positive to see that SK hynix's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
KOSE:A000660 Historic Dividend December 24th 2020

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by SK hynix's 6.4% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, SK hynix has lifted its dividend by approximately 21% a year on average.

To Sum It Up

Has SK hynix got what it takes to maintain its dividend payments? Earnings per share have fallen significantly, although at least SK hynix paid out less than half of its profits and free cash flow over the last year, leaving some margin of safety. All things considered, we are not particularly enthused about SK hynix from a dividend perspective.

However if you're still interested in SK hynix as a potential investment, you should definitely consider some of the risks involved with SK hynix. For example, we've found 3 warning signs for SK hynix that we recommend you consider before investing in the business.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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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