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Readers hoping to buy Omnicom Group Inc. (NYSE:OMC) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Ex-dividend means that investors that purchase the stock on or after the 18th of December will not receive this dividend, which will be paid on the 11th of January.
Omnicom Group's next dividend payment will be US$0.65 per share, and in the last 12 months, the company paid a total of US$2.60 per share. Looking at the last 12 months of distributions, Omnicom Group has a trailing yield of approximately 4.0% on its current stock price of $64.59. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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 (58%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 42% of the free cash flow it generated, which is a comfortable payout ratio.
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. If earnings fall far enough, the company could be forced to cut its dividend. 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. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. 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. Omnicom Group has delivered 13% dividend growth per year on average over the past 10 years.
To Sum It Up
Is Omnicom Group worth buying for its dividend? 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. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Omnicom Group's dividend merits.
On that note, you'll want to research what risks Omnicom Group is facing. To help with this, we've discovered 2 warning signs for Omnicom Group that you should be aware of before investing in their shares.
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.
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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