Origin Energy Limited (ASX:ORG) has announced that it will be increasing its dividend from last year's comparable payment on the 28th of March to A$0.30. This makes the dividend yield 5.8%, which is above the industry average.

See our latest analysis for Origin Energy

Origin Energy's Future Dividend Projections Appear Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Origin Energy was earning enough to cover the dividend, but it wasn't generating any free cash flows. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.

Looking forward, earnings per share is forecast to fall by 13.1% over the next year. If recent patterns in the dividend continue, we could see the payout ratio reaching 82% in the next 12 months, which is on the higher end of the range we would say is sustainable.ASX:ORG Historic Dividend February 15th 2025

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The dividend has gone from an annual total of A$0.50 in 2015 to the most recent total annual payment of A$0.60. This implies that the company grew its distributions at a yearly rate of about 1.8% over that duration. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.

The Dividend Has Growth Potential

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Origin Energy has impressed us by growing EPS at 7.5% per year over the past five years. The lack of cash flows does make us a bit cautious though, especially when it comes to the future of the dividend.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. Overall, we don't think this company has the makings of a good income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 2 warning signs for Origin Energy (of which 1 shouldn't be ignored!) you should know about. Is Origin Energy 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.

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