Three Things You Should Check Before Buying Oriental Food Industries Holdings Berhad (KLSE:OFI) For Its Dividend

Today we'll take a closer look at Oriental Food Industries Holdings Berhad (KLSE:OFI) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

A slim 1.7% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Oriental Food Industries Holdings Berhad could have potential. Some simple research can reduce the risk of buying Oriental Food Industries Holdings Berhad for its dividend - read on to learn more.

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Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 34% of Oriental Food Industries Holdings Berhad's profits were paid out as dividends in the last 12 months. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Oriental Food Industries Holdings Berhad paid out 18% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. 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.

With a strong net cash balance, Oriental Food Industries Holdings Berhad investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Oriental Food Industries Holdings Berhad every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. For the purpose of this article, we only scrutinise the last decade of Oriental Food Industries Holdings Berhad's dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was RM0.02 in 2011, compared to RM0.01 last year. The dividend has shrunk at around 2.8% a year during that period. Oriental Food Industries Holdings Berhad's dividend hasn't shrunk linearly at 2.8% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Oriental Food Industries Holdings Berhad for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Oriental Food Industries Holdings Berhad's EPS have fallen by approximately 15% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Oriental Food Industries Holdings Berhad's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Oriental Food Industries Holdings Berhad's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we like that the company's dividend payments appear well covered, although the retained capital also needs to be effectively reinvested. Earnings per share are down, and Oriental Food Industries Holdings Berhad's dividend has been cut at least once in the past, which is disappointing. In sum, we find it hard to get excited about Oriental Food Industries Holdings Berhad from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. To that end, Oriental Food Industries Holdings Berhad has 3 warning signs (and 1 which can't be ignored) we think you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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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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