Would KC Co., Ltd. (KRX:029460) Be Valuable To Income Investors?

Dividend paying stocks like KC Co., Ltd. (KRX:029460) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

Investors might not know much about KC's dividend prospects, even though it has been paying dividends for the last five years and offers a 0.9% yield. A 0.9% yield is not inspiring, but the longer payment history has some appeal. Some simple research can reduce the risk of buying KC for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on KC!

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 6.5% of KC's profits were paid out as dividends in the last 12 months. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. KC's cash payout ratio last year was 16%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's positive to see that KC'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.

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

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

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. KC has been paying a dividend for the past five years. During the past five-year period, the first annual payment was ₩370 in 2016, compared to ₩250 last year. This works out to be a decline of approximately 7.5% per year over that time.

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

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. KC has grown its earnings per share at 3.2% per annum over the past five years. Growth has been hard to come by. On the plus side, the dividend payout ratio is low and dividends could grow faster than earnings, if the company decides to increase its payout ratio.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. It's great to see that KC is paying out a low percentage of its earnings and cash flow. Unfortunately, earnings growth has also been mediocre, and we think it has not been paying dividends long enough to demonstrate resilience across economic cycles. Overall we think KC is an interesting dividend stock, although it could be better.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for KC that you should be aware of before investing.

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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