It looks like OGE Energy Corp. (NYSE:OGE) is about to go ex-dividend in the next four days. This means that investors who purchase shares on or after the 9th of July will not receive the dividend, which will be paid on the 30th of July.
OGE Energy's next dividend payment will be US$0.39 per share. Last year, in total, the company distributed US$1.55 to shareholders. Based on the last year's worth of payments, OGE Energy has a trailing yield of 5.1% on the current stock price of $30.63. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! 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. OGE Energy reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Over the last year, it paid out dividends equivalent to 207% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since OGE Energy is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. OGE Energy reported a loss last year, but at least the general trend suggests its income has been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. OGE Energy has delivered an average of 8.1% per year annual increase in its dividend, based on the past ten years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
Remember, you can always get a snapshot of OGE Energy's financial health, by checking our visualisation of its financial health, here.
From a dividend perspective, should investors buy or avoid OGE Energy? It's hard to get used to OGE Energy paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. Bottom line: OGE Energy has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
With that in mind though, if the poor dividend characteristics of OGE Energy don't faze you, it's worth being mindful of the risks involved with this business. To help with this, we've discovered 2 warning signs for OGE Energy (1 makes us a bit uncomfortable!) that you ought to be aware of before buying the shares.
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.
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.
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