Is It Smart To Buy Reach Subsea ASA (OB:REACH) Before It Goes Ex-Dividend?

It looks like Reach Subsea ASA (OB:REACH) is about to go ex-dividend in the next 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Reach Subsea's shares before the 3rd of June to receive the dividend, which will be paid on the 11th of June.

The company's upcoming dividend is kr00.36 a share, following on from the last 12 months, when the company distributed a total of kr0.36 per share to shareholders. Based on the last year's worth of payments, Reach Subsea has a trailing yield of 5.6% on the current stock price of kr06.44. If you buy this business for its dividend, you should have an idea of whether Reach Subsea's dividend is reliable and sustainable. So we need to investigate whether Reach Subsea can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Reach Subsea

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Fortunately Reach Subsea's payout ratio is modest, at just 41% of profit. 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 7.0% of its free cash flow in the last year.

It's positive to see that Reach Subsea'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.

Click here to see how much of its profit Reach Subsea paid out over the last 12 months.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Reach Subsea has grown its earnings rapidly, up 50% a year for the past five years. Reach Subsea is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last five years, Reach Subsea has lifted its dividend by approximately 39% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

Is Reach Subsea an attractive dividend stock, or better left on the shelf? It's great that Reach Subsea is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. It's a promising combination that should mark this company worthy of closer attention.

So while Reach Subsea looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. In terms of investment risks, we've identified 2 warning signs with Reach Subsea and understanding them should be part of your investment process.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.