Stock Analysis

Does RedcapTour Co., Ltd. (KOSDAQ:038390) Have A Place In Your Dividend Stock Portfolio?

KOSDAQ:A038390
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Is RedcapTour Co., Ltd. (KOSDAQ:038390) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

RedcapTour pays a 3.0% dividend yield, and has been paying dividends for the past two years. It's certainly an attractive yield, but readers are likely curious about its staying power. The company also returned around 1.1% of its market capitalisation to shareholders in the form of stock buybacks over the past year. That said, the recent jump in the share price will make RedcapTour's dividend yield look smaller, even though the company prospects could be improving. There are a few simple ways to reduce the risks of buying RedcapTour for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on RedcapTour!

historic-dividend
KOSDAQ:A038390 Historic Dividend May 3rd 2021

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. In the last year, RedcapTour paid out 58% of its profit as dividends. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Last year, RedcapTour paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

Consider getting our latest analysis on RedcapTour's financial position 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. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. Its most recent annual dividend was ₩800 per share, effectively flat on its first payment two years ago.

Modest dividend growth is good to see, especially with the payments being relatively stable. However, the payment history is relatively short and we wouldn't want to rely on this dividend too much.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. In the last five years, RedcapTour's earnings per share have shrunk at approximately 3.7% per annum. A modest decline in earnings per share is not great to see, but it doesn't automatically make a dividend unsustainable. Still, we'd vastly prefer to see EPS growth when researching dividend stocks.

Conclusion

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. First, the company has a payout ratio that was within an average range for most dividend stocks, but it paid out virtually all of its generated cash flow. Earnings per share have been falling, and the company has a relatively short dividend history - shorter than we like, anyway. Using these criteria, RedcapTour looks quite suboptimal from a dividend investment perspective.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 4 warning signs for RedcapTour (1 doesn't sit too well with us!) 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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