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Is It Worth Considering Korvest Ltd (ASX:KOV) For Its Upcoming Dividend?

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Simply Wall St
·4 min read
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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Korvest Ltd (ASX:KOV) is about to go ex-dividend in just 4 days. If you purchase the stock on or after the 18th of February, you won't be eligible to receive this dividend, when it is paid on the 5th of March.

Korvest's upcoming dividend is AU$0.15 a share, following on from the last 12 months, when the company distributed a total of AU$0.28 per share to shareholders. Calculating the last year's worth of payments shows that Korvest has a trailing yield of 5.7% on the current share price of A$4.95. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Korvest has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Korvest

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Korvest is paying out an acceptable 67% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Korvest generated enough free cash flow to afford its dividend. Over the past year it paid out 181% of its free cash flow as dividends, which is uncomfortably 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.

Korvest 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 Korvest'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. Cash is king, as they say, and were Korvest to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Korvest paid out over the last 12 months.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Korvest's earnings have been skyrocketing, up 25% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Korvest has seen its dividend decline 0.7% per annum on average over the past 10 years, which is not great to see.

To Sum It Up

Has Korvest got what it takes to maintain its dividend payments? It's good to see that earnings per share are growing and that the company's payout ratio is within a normal range for most businesses. However we're somewhat concerned that it paid out 181% of its cashflow, which is uncomfortably high. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

So if you want to do more digging on Korvest, you'll find it worthwhile knowing the risks that this stock faces. Every company has risks, and we've spotted 2 warning signs for Korvest you should know about.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.