As SK Telecom, considered a leading domestic dividend stock, said it will not pay dividends for the third quarter this year, investors who bought the shares expecting dividends were hit hard. As it became known that the fourth-quarter dividends are also uncertain, the share price fell for a second straight day.
Experts advise that when investing in dividend stocks, you should consider not only the dividend yield but also the sustainability of the dividends and the share price trend together.
SK Telecom decided not to pay dividends for the third quarter this year. That is because net profit plunged due to the fallout from large compensation payments and a penalty surcharge following the USIM hacking incident that occurred on Apr. in addition to fines. SK Telecom posted a third-quarter net loss of 166.7 billion won, swinging to a deficit from a year earlier.
For now, the dominant view is that fourth-quarter dividends will also be difficult. Costs for customer compensation programs such as cuts to mobile rates and data offerings will continue into the fourth quarter, and additional expenses from increased labor costs due to voluntary retirements and year-end organizational restructuring are set to be reflected. The fact that the fourth quarter is seasonally a period of low profitability is also a burden.
An Jae-min, an analyst at NH Investment & Securities, said, "There is a high possibility that they will not be able to pay dividends in the fourth quarter this year either," and noted, "SKT's annual dividend will be 1,630 won, in which case this year's dividend yield would be only 3.1 percent, about half that of its competitors." In effect, the dividend appeal has been greatly reduced.
Investors are in a tough spot. While SK Telecom's share price fell 5.25 percent through Oct. 31 this year, the KOSPI index rose 71.18 percent over the same period. In the end, they effectively invested to secure dividends rather than on the share price trend, but even that has entered an uncertain phase. Following the no-dividend decision, SK Telecom's share price fell for two consecutive days from the 30th, when it released its dividend policy.
A bigger problem than dividends simply being reduced is that SKT has lost its credibility as a "blue-chip dividend stock." A telecommunications-sector analyst who requested anonymity said, "The most important things in dividend-stock investing are predictability and stability, but this suspension of dividends has severely undermined confidence," and added, "Growth potential has not completely disappeared, but given that additional shareholder-return measures such as share buybacks are hard to expect, a cautious approach is needed."
Experts warn that investors should beware the traps of dividend stocks. They point out that if you invest solely on the high dividend yield of corporations with limited growth potential, losses from a weak share price trend may exceed the dividends.
An asset management industry official said, "It is important to assess the sustainability of dividends by comprehensively reviewing various factors such as operating profit and cash flow," and said, "Rather than chasing simple high-dividend stocks, it is advisable to select dividend growth stocks that have steadily increased dividends."