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Olam Group Limited's (SGX:VC2) investors are due to receive a payment of SGD0.03 per share on 14th of May. The dividend yield of 6.3% is still a nice boost to shareholder returns, despite the cut.
Our free stock report includes 5 warning signs investors should be aware of before investing in Olam Group. Read for free now.
Olam Group's Projections Indicate Future Payments May Be Unsustainable
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before this announcement, Olam Group was paying out 421% of what it was earning, and not generating any free cash flows either. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.
Looking forward, EPS could fall by 29.6% if the company can't turn things around from the last few years. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 629%, which is definitely a bit high to be sustainable going forward.
See our latest analysis for Olam Group
Dividend Volatility
Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2015, the dividend has gone from SGD0.05 total annually to SGD0.06. This works out to be a compound annual growth rate (CAGR) of approximately 1.8% a year over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.
The Dividend Has Limited Growth Potential
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Over the past five years, it looks as though Olam Group's EPS has declined at around 30% a year. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough.
We're Not Big Fans Of Olam Group's Dividend
Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. The company seems to be stretching itself a bit to make such big payments, but it doesn't appear they can be consistent over time. Overall, this doesn't get us very excited from an income standpoint.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come across 5 warning signs for Olam Group you should be aware of, and 4 of them don't sit too well with us. Is Olam Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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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.