Dividend paying stocks like ISU Petasys Co., Ltd. (KRX:007660) 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. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
A 1.7% yield is nothing to get excited about, but investors probably think the long payment history suggests ISU Petasys has some staying power. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
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. While ISU Petasys 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.
Unfortunately, while ISU Petasys pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.
Consider getting our latest analysis on ISU Petasys' financial position here.
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. For the purpose of this article, we only scrutinise the last decade of ISU Petasys' dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was ₩70.0 in 2011, compared to ₩60.0 last year. This works out to be a decline of approximately 1.5% per year over that time. ISU Petasys' dividend hasn't shrunk linearly at 1.5% per annum, but the CAGR is a useful estimate of the historical rate of change.
We struggle to make a case for buying ISU Petasys for its dividend, given that payments have shrunk over the past 10 years.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Over the past five years, it looks as though ISU Petasys' EPS have declined at around 74% a year. 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.
We'd also point out that ISU Petasys issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
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. ISU Petasys' dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Earnings per share are down, and ISU Petasys' dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with ISU Petasys from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. To that end, ISU Petasys has 3 warning signs (and 2 which are concerning) we think you should know about.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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