Why It Might Not Make Sense To Buy DigiCAP Co., Ltd. (KOSDAQ:197140) For Its Upcoming Dividend

Readers hoping to buy DigiCAP Co., Ltd. (KOSDAQ:197140) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 29th of December to receive the dividend, which will be paid on the 21st of April.

DigiCAP's next dividend payment will be ₩70.00 per share. Last year, in total, the company distributed ₩70.00 to shareholders. Last year's total dividend payments show that DigiCAP has a trailing yield of 1.6% on the current share price of ₩4385. 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 DigiCAP has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for DigiCAP

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. DigiCAP distributed an unsustainably high 151% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. DigiCAP paid a dividend despite reporting negative free cash flow over the last twelve months. This may be due to heavy investment in the business, but this is still suboptimal from a dividend sustainability perspective.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and DigiCAP fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. DigiCAP's earnings per share plummeted 25% over the past year,which is rarely good news for the dividend.

Unfortunately DigiCAP has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.

Final Takeaway

Should investors buy DigiCAP for the upcoming dividend? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (151%) and cash flow as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

So if you're still interested in DigiCAP despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 6 warning signs with DigiCAP (at least 1 which makes us a bit uncomfortable), and understanding them should be part of your investment process.

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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