Oceania Healthcare Limited (NZSE:OCA) stock is about to trade ex-dividend in 4 days time. This means that investors who purchase shares on or after the 9th of August will not receive the dividend, which will be paid on the 26th of August.
Oceania Healthcare's next dividend payment will be NZ$0.026 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 has a trailing yield of 4.6% on the current stock price of NZ$1.03. If you buy this business for its dividend, you should have an idea of whether Oceania Healthcare's dividend is reliable and sustainable. So we need to investigate whether Oceania Healthcare can afford its dividend, and if the dividend could grow.
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 paid out more than half (63%) 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. Over the past year it paid out 173% 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.
While Oceania Healthcare'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 Oceania Healthcare to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see Oceania Healthcare's earnings have been skyrocketing, up 54% 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.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 2 years ago, Oceania Healthcare has lifted its dividend by approximately 5.8% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
Should investors buy Oceania Healthcare for the upcoming dividend? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Oceania Healthcare paid out a much higher percentage of its free cash flow, which makes us uncomfortable. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
Ever wonder 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
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.
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