December 3, 2021

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We Wouldn’t Be Too Quick To Buy Olam International Limited (SGX:O32) Before It Goes Ex-Dividend

Olam International Limited (SGX:O32) stock is about to trade ex-dividend in 4 days time. Investors can purchase shares before the 27th of May in order to be eligible for this dividend, which will be paid on the 4th of June.

Olam International’s next dividend payment will be S$0.045 per share, on the back of last year when the company paid a total of S$0.08 to shareholders. Calculating the last year’s worth of payments shows that Olam International has a trailing yield of 5.4% on the current share price of SGD1.48. If you buy this business for its dividend, you should have an idea of whether Olam International’s dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it’s growing.

View our latest analysis for Olam International

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Olam International paid out 50% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year it paid out 54% of its free cash flow as dividends, within the usual range for most companies.

It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.

Click here to see how much of its profit Olam International paid out over the last 12 months.

SGX:O32 Historical Dividend Yield May 22nd 2020

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Olam International’s earnings per share have fallen at approximately 7.6% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Olam International has delivered 8.6% dividend growth per year on average over the past ten years. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it’s always worth checking for when the company can’t increase the payout ratio any more – because then the music stops.

The Bottom Line

Should investors buy Olam International for the upcoming dividend? While earnings per share are shrinking, it’s encouraging to see that at least Olam International’s dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. With the way things are shaping up from a dividend perspective, we’d be inclined to steer clear of Olam International.

So if you’re still interested in Olam International despite it’s poor dividend qualities, you should be well informed on some of the risks facing this stock. For instance, we’ve identified 3 warning signs for Olam International (1 shouldn’t be ignored) you should be aware of.

If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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. Thank you for reading.

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