Here's Why We're Wary Of Buying OGE Energy's (NYSE:OGE) For Its Upcoming Dividend
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see OGE Energy Corp. (NYSE:OGE) is about to trade ex-dividend in the next 3 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase OGE Energy's shares on or after the 5th of October will not receive the dividend, which will be paid on the 30th of October.
The company's next dividend payment will be US$0.42875 per share, on the back of last year when the company paid a total of US$1.70 to shareholders. Calculating the last year's worth of payments shows that OGE Energy has a trailing yield of 3.8% on the current share price of US$45.42. If you buy this business for its dividend, you should have an idea of whether OGE Energy's dividend is reliable and sustainable. As a result, readers should always check whether OGE Energy has been able to grow its dividends, or if the dividend might be cut.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. OGE Energy is paying out an acceptable 74% of its profit, a common payout level among most companies. 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. OGE Energy paid out more free cash flow than it generated - 127%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
OGE Energy paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were OGE Energy to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
View our latest analysis for OGE Energy
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by OGE Energy's 11% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, OGE Energy has increased its dividend at approximately 4.5% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.
To Sum It Up
From a dividend perspective, should investors buy or avoid OGE Energy? OGE Energy had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. Bottom line: OGE Energy has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with OGE Energy. For instance, we've identified 2 warning signs for OGE Energy (1 is potentially serious) you should be aware of.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.