Stock Analysis

It Might Not Be A Great Idea To Buy Oceania Healthcare Limited (NZSE:OCA) For Its Next Dividend

NZSE:OCA
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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Oceania Healthcare Limited (NZSE:OCA) is about to go ex-dividend in just 4 days. You can purchase shares before the 9th of February in order to receive the dividend, which the company will pay on the 24th of February.

Oceania Healthcare's next dividend payment will be NZ$0.013 per share, and in the last 12 months, the company paid a total of NZ$0.025 per share. Based on the last year's worth of payments, Oceania Healthcare stock has a trailing yield of around 1.6% on the current share price of NZ$1.56. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Oceania Healthcare has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Oceania Healthcare

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. Oceania Healthcare lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Luckily it paid out just 11% of its free cash flow last year.

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

historic-dividend
NZSE:OCA Historic Dividend February 4th 2021

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Oceania Healthcare reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Oceania Healthcare has seen its dividend decline 16% per annum on average over the past three years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

Remember, you can always get a snapshot of Oceania Healthcare's financial health, by checking our visualisation of its financial health, here.

Final Takeaway

Is Oceania Healthcare worth buying for its dividend? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. It's not that we think Oceania Healthcare is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Oceania Healthcare don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 3 warning signs for Oceania Healthcare you should know about.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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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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