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Don't Buy Oceania Healthcare Limited (NZSE:OCA) For Its Next Dividend Without Doing These Checks

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Oceania Healthcare Limited (NZSE:OCA) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 7th of February will not receive this dividend, which will be paid on the 24th of February.

Oceania Healthcare's next dividend payment will be NZ$0.023 per share. Last year, in total, the company distributed NZ$0.047 to shareholders. Based on the last year's worth of payments, Oceania Healthcare stock has a trailing yield of around 3.9% on the current share price of NZ$1.22. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Oceania Healthcare has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Oceania Healthcare

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Oceania Healthcare is paying out an acceptable 50% of its profit, a common payout level among most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out more than half (61%) of its free cash flow in the past year, which is within an average range for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

NZSE:OCA Historical Dividend Yield, February 2nd 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Oceania Healthcare's earnings per share have fallen at approximately 6.1% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Oceania Healthcare has delivered 5.8% dividend growth per year on average over the past two years. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

To Sum It Up

Should investors buy Oceania Healthcare for the upcoming dividend? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Wondering what the future holds for Oceania Healthcare? See what the four analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.