Could OC Oerlikon Corporation AG (VTX:OERL) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
With a eight-year payment history and a 3.5% yield, many investors probably find OC Oerlikon intriguing. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying OC Oerlikon for its dividend, and we'll go through these below.
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Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 75% of OC Oerlikon's profits were paid out as dividends in the last 12 months. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. With a cash payout ratio of 658%, OC Oerlikon's dividend payments are poorly covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. OC Oerlikon paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Cash is king, as they say, and were OC Oerlikon to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
While the above analysis focuses on dividends relative to a company's earnings, we do note OC Oerlikon's strong net cash position, which will let it pay larger dividends for a time, should it choose.
Consider getting our latest analysis on OC Oerlikon's financial position here.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. The first recorded dividend for OC Oerlikon, in the last decade, was eight years ago. The company has been paying a stable dividend for a while now, which is great. However we'd prefer to see consistency for a few more years before giving it our full seal of approval. During the past eight-year period, the first annual payment was CHF0.20 in 2011, compared to CHF0.35 last year. Dividends per share have grown at approximately 7.2% per year over this time.