It Might Not Be A Great Idea To Buy OKA Corporation Bhd (KLSE:OKA) For Its Next Dividend

OKA Corporation Bhd (KLSE:OKA) is about to trade ex-dividend in the next 4 days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, OKA Corporation Bhd investors that purchase the stock on or after the 14th of May will not receive the dividend, which will be paid on the 23rd of May.

The company's next dividend payment will be RM00.012 per share. Last year, in total, the company distributed RM0.024 to shareholders. Last year's total dividend payments show that OKA Corporation Bhd has a trailing yield of 4.4% on the current share price of RM00.54. 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 investigate whether OKA Corporation Bhd can afford its dividend, and if the dividend could grow.

Our free stock report includes 3 warning signs investors should be aware of before investing in OKA Corporation Bhd. Read for free now.

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. OKA Corporation Bhd paid out more than half (52%) of its earnings last year, which is a regular payout ratio for most companies. 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 109% of its free cash flow in the form of dividends last year, which is outside the comfort zone 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.

OKA Corporation Bhd does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While OKA Corporation Bhd's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to OKA Corporation Bhd's ability to maintain its dividend.

View our latest analysis for OKA Corporation Bhd

Click here to see how much of its profit OKA Corporation Bhd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. That explains why we're not overly excited about OKA Corporation Bhd's flat earnings over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, OKA Corporation Bhd has lifted its dividend by approximately 4.1% a year on average.

To Sum It Up

Is OKA Corporation Bhd an attractive dividend stock, or better left on the shelf? In addition to earnings being flat, OKA Corporation Bhd is paying out a reasonable percentage of its earnings as profits. However, the dividend was not well covered by free cash flow. 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 OKA Corporation Bhd despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For instance, we've identified 3 warning signs for OKA Corporation Bhd (1 can't be ignored) you should be aware of.

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.