Should You Buy Odfjell Drilling Ltd. (OB:ODL) For Its Upcoming Dividend?

Odfjell Drilling Ltd. (OB:ODL) stock is about to trade ex-dividend in four days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Odfjell Drilling's shares before the 1st of March in order to be eligible for the dividend, which will be paid on the 14th of March.

The company's next dividend payment will be US$0.06 per share, on the back of last year when the company paid a total of US$0.24 to shareholders. Calculating the last year's worth of payments shows that Odfjell Drilling has a trailing yield of 5.9% on the current share price of kr043.15. 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 investigate whether Odfjell Drilling can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Odfjell Drilling

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Odfjell Drilling paid out just 19% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. The good news is it paid out just 14% of its free cash flow in the last year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Odfjell Drilling has grown its earnings rapidly, up 56% a year for the past five years. With earnings per share growing rapidly and the company sensibly reinvesting almost all of its profits within the business, Odfjell Drilling looks like a promising growth company.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Odfjell Drilling has lifted its dividend by approximately 17% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

The Bottom Line

Is Odfjell Drilling worth buying for its dividend? Odfjell Drilling has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. There's a lot to like about Odfjell Drilling, and we would prioritise taking a closer look at it.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. To help with this, we've discovered 3 warning signs for Odfjell Drilling (1 makes us a bit uncomfortable!) that you ought to be aware of before buying the shares.

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.