RaySearch Laboratories (STO:RAY B) Is Increasing Its Dividend To SEK3.00

RaySearch Laboratories AB (publ) (STO:RAY B) will increase its dividend from last year's comparable payment on the 30th of May to SEK3.00. This will take the dividend yield to an attractive 1.4%, providing a nice boost to shareholder returns.

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RaySearch Laboratories' Payment Could Potentially Have Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, RaySearch Laboratories' dividend was comfortably covered by both cash flow and earnings. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.

Looking forward, earnings per share is forecast to rise by 23.7% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 47% by next year, which is in a pretty sustainable range.

See our latest analysis for RaySearch Laboratories

RaySearch Laboratories' Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. Since 2016, the annual payment back then was SEK0.25, compared to the most recent full-year payment of SEK3.00. This works out to be a compound annual growth rate (CAGR) of approximately 32% a year over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

The Dividend Looks Likely To Grow

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. RaySearch Laboratories has impressed us by growing EPS at 32% per year over the past five years. The company's earnings per share has grown rapidly in recent years, and it has a good balance between reinvesting and paying dividends to shareholders, so we think that RaySearch Laboratories could prove to be a strong dividend payer.

RaySearch Laboratories Looks Like A Great Dividend Stock

Overall, we think this could be an attractive income stock, and it is only getting better by paying a higher dividend this year. Earnings are easily covering distributions, and the company is generating plenty of cash. Taking this all into consideration, this looks like it could be a good dividend opportunity.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign for RaySearch Laboratories that you should be aware of before investing. 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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