Should You Buy PS Tec. Co., Ltd. (KOSDAQ:002230) For Its 3.2% Dividend?

Today we'll take a closer look at PS Tec. Co., Ltd. (KOSDAQ:002230) 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. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

PS Tec has only been paying a dividend for a year or so, so investors might be curious about its 3.2% yield. The company also bought back stock equivalent to around 7.2% of market capitalisation this year. Some simple analysis can reduce the risk of holding PS Tec for its dividend, and we'll focus on the most important aspects below.

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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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although PS Tec pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

PS Tec paid out 95% of its free cash flow last year, which we think is concerning if cash flows do not improve.

While the above analysis focuses on dividends relative to a company's earnings, we do note PS Tec's strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on PS Tec 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. 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. This works out to be a compound annual growth rate (CAGR) of approximately 100% a year over that time.

PS Tec has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

Dividend Growth Potential

The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. PS Tec's EPS have fallen by approximately 41% per year during 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

To summarise, shareholders should always check that PS Tec's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. PS Tec's dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Second, earnings per share have been in decline, and the dividend history is shorter than we'd like. Using these criteria, PS Tec looks quite suboptimal from a dividend investment perspective.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 3 warning signs for PS Tec (of which 1 can't be ignored!) 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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