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Omnicom Group Inc. (NYSE:OMC) is about to trade ex-dividend in the next four days. If you purchase the stock on or after the 18th of September, you won't be eligible to receive this dividend, when it is paid on the 12th of October.
Omnicom Group's upcoming dividend is US$0.65 a share, following on from the last 12 months, when the company distributed a total of US$2.60 per share to shareholders. Last year's total dividend payments show that Omnicom Group has a trailing yield of 5.0% on the current share price of $52.32. If you buy this business for its dividend, you should have an idea of whether Omnicom Group's dividend is reliable and sustainable. As a result, readers should always check whether Omnicom Group has been able to grow its dividends, or if the dividend might be cut.
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. Omnicom Group paid out more than half (60%) of its earnings last year, which is a regular payout ratio for 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. Fortunately, it paid out only 40% of its free cash flow in the past year.
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.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that Omnicom Group's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Omnicom Group has lifted its dividend by approximately 16% a year on average.
Has Omnicom Group got what it takes to maintain its dividend payments? It's unfortunate that earnings per share have not grown, and we'd note that Omnicom Group is paying out lower percentage of its cashflow than its profit, but overall the dividend looks well covered by earnings. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
So while Omnicom Group looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Our analysis shows 1 warning sign for Omnicom Group and you should be aware of this before buying any shares.
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.
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