Why It Might Not Make Sense To Buy Park-Ohio Holdings Corp. (NASDAQ:PKOH) For Its Upcoming Dividend

Park-Ohio Holdings Corp. (NASDAQ:PKOH) stock is about to trade ex-dividend in three days. If you purchase the stock on or after the 13th of November, you won't be eligible to receive this dividend, when it is paid on the 30th of November.

Park-Ohio Holdings's next dividend payment will be US$0.13 per share, and in the last 12 months, the company paid a total of US$0.50 per share. Looking at the last 12 months of distributions, Park-Ohio Holdings has a trailing yield of approximately 2.2% on its current stock price of $23.15. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Park-Ohio Holdings has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Park-Ohio Holdings

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. Park-Ohio Holdings 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. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. 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. It paid out 6.1% of its free cash flow as dividends last year, which is conservatively low.

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. Park-Ohio Holdings reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. It looks like the Park-Ohio Holdings dividends are largely the same as they were seven years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

Remember, you can always get a snapshot of Park-Ohio Holdings's financial health, by checking our visualisation of its financial health, here.

The Bottom Line

Should investors buy Park-Ohio Holdings for the upcoming dividend? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Park-Ohio Holdings and want to know more, you'll find it very useful to know what risks this stock faces. To help with this, we've discovered 3 warning signs for Park-Ohio Holdings (1 is potentially serious!) that you ought to be aware of before buying the shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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