Odfjell Drilling (OB:ODL) Could Be A Buy For Its Upcoming Dividend

Readers hoping to buy Odfjell Drilling Ltd. (OB:ODL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Accordingly, Odfjell Drilling investors that purchase the stock on or after the 12th of November will not receive the dividend, which will be paid on the 26th of November.

The company's upcoming dividend is US$0.20 a share, following on from the last 12 months, when the company distributed a total of US$0.72 per share to shareholders. Last year's total dividend payments show that Odfjell Drilling has a trailing yield of 9.1% on the current share price of kr080.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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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. Odfjell Drilling paid out 52% of its earnings to investors last year, a normal payout level for most businesses. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (60%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that Odfjell Drilling's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Check out our latest analysis for Odfjell Drilling

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. It's encouraging to see Odfjell Drilling has grown its earnings rapidly, up 34% a year for the past five years. The current payout ratio suggests a good balance between rewarding shareholders with dividends, and reinvesting in growth. With a reasonable payout ratio, profits being reinvested, and some earnings growth, Odfjell Drilling could have strong prospects for future increases to the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, two years ago, Odfjell Drilling has lifted its dividend by approximately 73% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

The Bottom Line

From a dividend perspective, should investors buy or avoid Odfjell Drilling? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That's why we're glad to see Odfjell Drilling's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 52% and 60% respectively. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Odfjell Drilling's dividend merits.

Curious what other investors think of Odfjell Drilling? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

If you're in the market for strong dividend payers, we recommend checking 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.