Readers hoping to buy Oceania Healthcare Limited (NZSE:OCA) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 31st of July in order to be eligible for this dividend, which will be paid on the 17th of August.
Oceania Healthcare's upcoming dividend is NZ$0.012 a share, following on from the last 12 months, when the company distributed a total of NZ$0.035 per share to shareholders. Last year's total dividend payments show that Oceania Healthcare has a trailing yield of 3.5% on the current share price of NZ$1.01. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
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. Oceania Healthcare lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It distributed 38% of its free cash flow as dividends, a comfortable payout level for most companies.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Oceania Healthcare reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Oceania Healthcare's dividend payments per share have declined at 5.9% per year on average over the past three years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.
From a dividend perspective, should investors buy or avoid Oceania Healthcare? It's hard to get used to Oceania Healthcare paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
With that being said, if you're still considering Oceania Healthcare as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 3 warning signs for Oceania Healthcare that we recommend you consider before investing in the business.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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.
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