Olin Corporation (OPLN) and the High Risk of an Impending Dividend Cut

Olin Corporation (OPLN), a leading player in the chemical and materials sector, has long been a staple for income-focused investors. However, a closer examination of its financial health reveals a troubling disconnect between its dividend commitments and its underlying profitability and cash flow. With a dividend payout ratio exceeding 170% in 2023 and a debt burden that has outpaced industry norms, the sustainability of Olin's dividend appears increasingly precarious.

A Dividend Not Backed by Earnings

Olin's 2023 dividend of $0.80 per share, or $1.00 annually, was funded by a net income of just $460.2 million, translating to a payout ratio of 171.83%. This means the company distributed more in dividends than it earned in profits during the year. Such a practice is unsustainable in the long term, as it relies on external financing or asset sales to maintain payouts. For context, the Basic Materials sector's average payout ratio in 2023 was 35.4%, underscoring how Olin's approach diverges sharply from industry norms.

The company's reliance on non-operational metrics to justify its dividend is further evident in its adjusted EBITDA of $1.3 billion for 2023. While this figure excludes non-cash expenses like depreciation and amortization, it does not account for the cash required to service its $3.3 billion in total debt. With a debt-to-EBITDA ratio of 3.7x-well above its five-year average of 2.8x-Olin's leverage has grown to levels that could strain its liquidity, particularly if interest rates remain elevated or economic conditions deteriorate.

Operating Cash Flow Falls Short

Even Olin's operating cash flow fails to provide a buffer for its dividend. According to Yahoo Finance, the company generated $294.7 million in operating cash flow in 2023, significantly less than the $1.00 per share dividend (which would require approximately $130 million in cash, assuming 130 million shares outstanding). This gap highlights a critical vulnerability: Olin's ability to fund its dividend is not rooted in its core operations but rather in its capital structure and accounting adjustments.

The fourth quarter of 2023 further illustrates this fragility. While adjusted EBITDA reached $210.1 million, net income plummeted to $52.9 million, a 63% decline from the same period in 2022. This discrepancy suggests that non-operational factors-such as restructuring charges or insurance recoveries-have artificially inflated EBITDA, masking underlying profitability.

Industry Benchmarks and Investor Risks

The chemical industry's financial benchmarks paint a stark picture of Olin's position. For instance, the Building Materials sector maintains a payout ratio of 16.63%, while Metals & Mining companies average 69.06%. Olin's 171.83% ratio far exceeds these thresholds, signaling a heightened risk of a dividend cut. Such a move would not only disappoint income investors but also erode confidence in the company's management of capital.

Moreover, Olin's aggressive share repurchases in 2023- $711.3 million worth-further strain its liquidity. While buybacks can enhance shareholder value, they become problematic when funded by debt or at the expense of dividend sustainability. With interest rates at multi-decade highs, refinancing costs could rise, leaving Olin with fewer resources to maintain its payout.

Conclusion: A Dividend in Peril

Olin Corporation's dividend appears to be a house of cards, propped up by accounting adjustments and a debt-fueled capital structure. While the company's leadership may argue that its adjusted EBITDA and strong historical performance justify the payout, the reality is that its operating cash flow and net income cannot support the current dividend. For investors, the risk of an impending cut is real-and the consequences could be severe.

As the company navigates a challenging macroeconomic environment, it is imperative for Olin to reassess its dividend policy. Until then, income investors would be wise to tread cautiously.