Otter Tail's (NASDAQ:OTTR) Upcoming Dividend Will Be Larger Than Last Year's

The board of Otter Tail Corporation (NASDAQ:OTTR) has announced that it will be increasing its dividend by 5.8% on the 10th of March to US$0.41. Despite this raise, the dividend yield of 2.5% is only a modest boost to shareholder returns.

Check out our latest analysis for Otter Tail

Otter Tail's Earnings Easily Cover the Distributions

Even a low dividend yield can be attractive if it is sustained for years on end. Based on the last payment, Otter Tail's earnings were much higher than the dividend, but it wasn't converting those earnings into cash flow. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

Over the next year, EPS is forecast to expand by 1.5%. Assuming the dividend continues along recent trends, we think the payout ratio could be 47% by next year, which is in a pretty sustainable range.

Otter Tail Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2012, the first annual payment was US$1.19, compared to the most recent full-year payment of US$1.56. This implies that the company grew its distributions at a yearly rate of about 2.7% over that duration. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.

The Dividend Looks Likely To Grow

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Otter Tail has impressed us by growing EPS at 17% per year over the past five years. The company is paying out a lot of its cash as a dividend, but it looks okay based on the payout ratio.

Our Thoughts On Otter Tail's Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come across 3 warning signs for Otter Tail you should be aware of, and 1 of them is significant. We have also put together a list of global stocks with a solid dividend.

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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.