Overseas Education (SGX:RQ1) Has Announced That Its Dividend Will Be Reduced To S$0.013

Overseas Education Limited (SGX:RQ1) has announced it will be reducing its dividend payable on the 20th of May to S$0.013. However, the dividend yield of 4.9% is still a decent boost to shareholder returns.

See our latest analysis for Overseas Education

Overseas Education's Dividend Is Well Covered By Earnings

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before this announcement, Overseas Education was paying out 85% of earnings, but a comparatively small 25% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Over the next year, EPS could expand by 3.8% if the company continues along the path it has been on recently. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 83%, which is definitely on the higher side, but we wouldn't necessarily say this is unsustainable.

Overseas Education's Dividend Has Lacked Consistency

Looking back, Overseas Education's dividend hasn't been particularly consistent. This makes us cautious about the consistency of the dividend over a full economic cycle. The dividend has gone from S$0.028 in 2013 to the most recent annual payment of S$0.013. Doing the maths, this is a decline of about 8.0% per year. A company that decreases its dividend over time generally isn't what we are looking for.

The Dividend's Growth Prospects Are Limited

Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. Earnings has been rising at 3.8% per annum over the last five years, which admittedly is a bit slow. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.

Our Thoughts On Overseas Education's Dividend

Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. Overall, we don't think this company has the makings of a good income stock.

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, Overseas Education has 5 warning signs (and 1 which is concerning) we think you should know about. Is Overseas Education not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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