Reach Subsea's (OB:REACH) Dividend Will Be Increased To NOK0.36

The board of Reach Subsea ASA ( OB:REACH ) has announced that it will be increasing its dividend by 100% on the 11th of June to NOK0.36, up from last year's comparable payment of NOK0.18. This takes the annual payment close to 7% of the current stock price.

See our latest analysis for Reach Subsea

Reach Subsea's Payment Has Solid Earnings Coverage

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Before making this announcement, Reach Subsea was easily earning enough to cover the dividend. This means that most of its earnings are being retained to grow the business.

EPS is set to fall by 4.9% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could be 54%, which we are pretty comfortable with and we think is feasible on an earnings basis.

Reach Subsea's Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. The dividend has gone from an annual total of NOK0.07 in 2019 to the most recent total annual payment of NOK0.18. This implies that the company grew its distributions at a yearly rate of about 21% over that duration. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

The Dividend Looks Likely To Grow

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's encouraging to see that Reach Subsea has been growing its earnings per share at 53% a year over the past five years. Rapid earnings growth and a low payout ratio suggest this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.

An additional note is that the company has been raising capital by issuing stock equal to 20% of shares outstanding in the last 12 months. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

We Really Like Reach Subsea's Dividend

Overall, we think this could be an attractive income stock, and it is only getting better by paying a higher dividend this year. The earnings easily cover the company's distributions, and the company is generating plenty of cash. However, it is worth noting that the earnings are expected to fall over the next year, which may not change the long term outlook, but could affect the dividend payment in the next 12 months. All of these factors considered, we think this has solid potential as a dividend stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 1 warning sign for Reach Subsea that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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