Is Woojin Inc. (KRX:105840) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.
Some readers mightn't know much about Woojin's 2.5% dividend, as it has only been paying distributions for a year or so. The company also returned around 2.1% of its market capitalisation to shareholders in the form of stock buybacks over the past year. There are a few simple ways to reduce the risks of buying Woojin for its dividend, and we'll go through these below.
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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Woojin paid out 246% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Last year, Woojin paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.
Remember, you can always get a snapshot of Woojin's latest financial position, by checking our visualisation of its financial health.
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. 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. Its most recent annual dividend was ₩100 per share.
We like that the dividend hasn't been shrinking. However we're conscious that the company hasn't got an overly long track record of dividend payments yet, which makes us wary of relying on its dividend income.
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. It's good to see Woojin has been growing its earnings per share at 10% a year over the past five years. Paying out more in dividends than was reported as profit can make sense in some cases, we would be inclined to avoid a company doing this, unless there were a solid reason.
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. We're a bit uncomfortable with Woojin paying out a high percentage of both its cashflow and earnings. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we'd like. In summary, Woojin has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 4 warning signs for Woojin 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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