Dividend-paying stocks such as Oriental Hotels Limited (NSE: ORIENTHOT) are typically popular with investors, and for good reason – some research suggests that a significant portion of all stock market returns come from reinvested dividends. Unfortunately, it’s common for investors to be drawn to the seemingly attractive yield and lose money when the company has to cut its dividend payments.
A 0.9% return isn’t cause for alarm, but investors likely believe its long payment history suggests Oriental Hotels has some stamina. Some simple analysis can reduce the risk of holding Oriental Hotels for the dividend, and we’ll focus on the key points below.
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NSEI: ORIENTHOT historic dividend February 1, 2021
Payout percentages
Dividends are usually paid out of corporate profits. When a company pays more dividends than it earns, the dividend can become unsustainable – hardly an ideal situation. Comparing dividend payments to a company’s net income after tax is an easy way to see if a dividend is sustainable. Although Oriental Hotels pays a dividend, it was a loss last year. If a company recently reported a loss, we should investigate whether its cash flows will cover the dividend.
Unfortunately, while Oriental Hotels pays a dividend, it also posted negative free cash flow last year. There may be a good reason for this, but it’s not ideal from a dividend perspective.
Consider getting You can find our latest analysis of Oriental Hotels’ financial condition here
Dividend volatility
One of the biggest risks of relying on dividend income is a company’s potential to struggle financially and lower its dividend. Not only will your income be reduced, but the value of your investment will decrease as well. For the purposes of this article, we only examine the past decade of Oriental Hotels dividend payments. Dividend payments have decreased at least once in the past 10 years. For the past 10 years, the first annual payment in 2011 was £ 0.8 compared to £ 0.2 a year earlier. The dividend has fallen 73% over the period.
A shrinking dividend over a 10 year period isn’t ideal, and we would be concerned about investing in a dividend stock that doesn’t have a solid record of growing dividends per share.
Dividend growth potential
With a relatively unstable dividend and a bad history of declining dividends, it’s even more important to see if EPS is growing. Oriental Hotels EPS has decreased by approximately 26% per year over the past five years. A sharp drop in earnings per share is not big from a dividend perspective, as even conservative payout ratios can come under pressure if earnings drop far enough.
Conclusion
When we look at a dividend stock, we need to make a judgment about whether the dividend will rise, whether the company can hold it in a variety of economic circumstances, and whether the dividend payout is sustainable. Oriental Hotels’ dividend is not well covered by free cash flow and has paid a dividend even though it is unprofitable. Second, earnings per share were down, and the dividend has been cut at least once in the past. According to these criteria, Oriental Hotels looks quite suboptimal from a dividend investment perspective.
Investors generally tend to prefer companies with a consistent, stable dividend policy over companies with an erratic dividend policy. Despite the importance of dividend payments, these aren’t the only factors our readers should be aware of when evaluating a company. For example we identified 5 warning signs for Oriental Hotels (2 are important!) To Consider Before Investing.
Are you looking for high yield dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
Funded
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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