Why It Might Not Make Sense To Buy LOTTE Fine Chemical Co., Ltd. (KRX:004000) For Its Upcoming Dividend

LOTTE Fine Chemical Co., Ltd. (KRX:004000) stock is about to trade ex-dividend in three days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Therefore, if you purchase LOTTE Fine Chemical's shares on or after the 30th of March, you won't be eligible to receive the dividend, when it is paid on the 1st of January.

The company's next dividend payment will be ₩1500.00 per share. Last year, in total, the company distributed ₩1,500 to shareholders. Based on the last year's worth of payments, LOTTE Fine Chemical has a trailing yield of 3.0% on the current stock price of ₩50600.00. If you buy this business for its dividend, you should have an idea of whether LOTTE Fine Chemical's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

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Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. LOTTE Fine Chemical is paying out an acceptable 59% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether LOTTE Fine Chemical generated enough free cash flow to afford its dividend. LOTTE Fine Chemical paid out more free cash flow than it generated - 121%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

LOTTE Fine Chemical does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While LOTTE Fine Chemical's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to LOTTE Fine Chemical's ability to maintain its dividend.

View our latest analysis for LOTTE Fine Chemical

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. LOTTE Fine Chemical's earnings per share have fallen at approximately 12% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. LOTTE Fine Chemical's dividend payments per share have declined at 1.8% per year on average over the past seven years, which is uninspiring.

The Bottom Line

Is LOTTE Fine Chemical an attractive dividend stock, or better left on the shelf? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of LOTTE Fine Chemical.

With that in mind though, if the poor dividend characteristics of LOTTE Fine Chemical don't faze you, it's worth being mindful of the risks involved with this business. In terms of investment risks, we've identified 1 warning sign with LOTTE Fine Chemical and understanding them should be part of your investment process.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.