Dividend Investors: Don't Be Too Quick To Buy Orora Limited (ASX:ORA) For Its Upcoming Dividend

It looks like Orora Limited (ASX:ORA) is about to go ex-dividend in the next 4 days. The ex-dividend date generally occurs two days 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 29th of August in order to receive the dividend, which the company will pay on the 7th of October.

The company's next dividend payment will be AU$0.05 per share, on the back of last year when the company paid a total of AU$0.10 to shareholders. Based on the last year's worth of payments, Orora stock has a trailing yield of around 4.4% on the current share price of AU$2.27. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

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Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Orora paid out a disturbingly high 200% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. 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. Over the past year it paid out 125% 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.

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.

Check out our latest analysis for Orora

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Orora's earnings per share have risen 13% per annum over the last five years. Earnings are growing pretty quickly, which is great, but it's uncomfortably to see the company paying out 200% of earnings. We're wary of fast-growing companies flaming out by over-committing themselves financially, and consider this a yellow flag.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Orora has increased its dividend at approximately 1.3% 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.

Final Takeaway

Has Orora got what it takes to maintain its dividend payments? While it's nice to see earnings per share growing, we're curious about how Orora intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. It's not that we think Orora is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

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. To that end, you should learn about the 3 warning signs we've spotted with Orora (including 1 which is potentially serious).

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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.