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Otter Tail Corporation (NASDAQ:OTTR) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. 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. Therefore, if you purchase Otter Tail's shares on or after the 15th of May, you won't be eligible to receive the dividend, when it is paid on the 10th of June.
The company's next dividend payment will be US$0.525 per share, and in the last 12 months, the company paid a total of US$2.10 per share. Last year's total dividend payments show that Otter Tail has a trailing yield of 2.7% on the current share price of US$76.96. 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 check whether the dividend payments are covered, and if earnings are growing.
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. Fortunately Otter Tail's payout ratio is modest, at just 27% of profit. A useful secondary check can be to evaluate whether Otter Tail generated enough free cash flow to afford its dividend. It paid out 104% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.
While Otter Tail'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 Otter Tail's ability to maintain its dividend.
See our latest analysis for Otter Tail
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Otter Tail has grown its earnings rapidly, up 26% a year for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.