Oriental Aromatics' (NSE:OAL) Shareholders Will Receive A Smaller Dividend Than Last Year

Oriental Aromatics Limited (NSE:OAL) is reducing its dividend to ₹1.50 on the 27th of December. This payment takes the dividend yield to 0.2%, which only provides a modest boost to overall returns.

View our latest analysis for Oriental Aromatics

Oriental Aromatics' Payment Has Solid Earnings Coverage

If it is predictable over a long period, even low dividend yields can be attractive. Oriental Aromatics is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.

Over the next year, EPS could expand by 18.9% if recent trends continue. If the dividend continues along recent trends, we estimate the payout ratio will be 5.7%, which is in the range that makes us comfortable with the sustainability of the dividend.

Dividend Volatility

The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. Since 2011, the first annual payment was ₹0.38, compared to the most recent full-year payment of ₹1.50. This means that it has been growing its distributions at 15% per annum over that time. Oriental Aromatics has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Oriental Aromatics has seen EPS rising for the last five years, at 19% per annum. Oriental Aromatics definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

In Summary

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 2 warning signs for Oriental Aromatics (of which 1 is concerning!) you should know about. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.

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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.