Yahoo Finance Dividend Investors: Don't Be Too Quick To Buy Orora Limited (ASX:ORA) For Its Upcoming Dividend
Orora Limited (ASX:ORA) is about to trade ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Orora's shares on or after the 5th of March will not receive the dividend, which will be paid on the 11th of April.
The company's next dividend payment will be AU$0.05 per share. Last year, in total, the company distributed AU$0.18 to shareholders. Looking at the last 12 months of distributions, Orora has a trailing yield of approximately 6.7% on its current stock price of AU$2.68. If you buy this business for its dividend, you should have an idea of whether Orora's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
View our latest analysis for Orora
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Orora paid out 93% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. It paid out 96% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.
Cash is slightly more important than profit from a dividend perspective, but given Orora's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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. Readers will understand then, why we're concerned to see Orora's earnings per share have dropped 13% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Orora also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.
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, 10 years ago, Orora has lifted its dividend by approximately 9.1% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Orora is already paying out 93% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
To Sum It Up
Is Orora worth buying for its dividend? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (93%) and cash flow as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
Although, if you're still interested in Orora and want to know more, you'll find it very useful to know what risks this stock faces. We've identified 4 warning signs with Orora (at least 3 which can't be ignored), and understanding these should be part of your investment process.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
