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 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase Orora's shares before the 1st of March in order to receive the dividend, which the company will pay on the 12th of April.

The company's next dividend payment will be AU$0.085 per share. Last year, in total, the company distributed AU$0.17 to shareholders. Based on the last year's worth of payments, Orora stock has a trailing yield of around 4.9% on the current share price of A$3.45. If you buy this business for its dividend, you should have an idea of whether Orora's dividend is reliable and sustainable. As a result, readers should always check whether Orora has been able to grow its dividends, or if the dividend might be cut.

Check out 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. It paid out 75% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. 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. The company paid out 98% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Orora paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Orora's ability to maintain its dividend.

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

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. 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 encouraged by the steady growth at Orora, with earnings per share up 5.1% on average over the last five years. Earnings have been growing at a steady rate, 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. Orora has delivered an average of 11% per year annual increase in its dividend, based on the past eight years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Orora worth buying for its dividend? Orora is paying out a reasonable percentage of its income and an uncomfortably high 98% of its cash flow as dividends. At least earnings per share have been growing steadily. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in Orora despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. To help with this, we've discovered 2 warning signs for Orora that you should be aware of before investing in their shares.

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.