Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Atea ASA (OB:ATEA) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 24th of October will not receive this dividend, which will be paid on the 6th of November.
Atea's next dividend payment will be kr3.3 per share. Last year, in total, the company distributed kr6.5 to shareholders. Based on the last year's worth of payments, Atea stock has a trailing yield of around 5.2% on the current share price of NOK124. If you buy this business for its dividend, you should have an idea of whether Atea's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Atea distributed an unsustainably high 138% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Atea generated enough free cash flow to afford its dividend. It distributed 37% of its free cash flow as dividends, a comfortable payout level for most companies.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Atea fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
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 fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Atea earnings per share are up 7.3% per annum over the last five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Atea has delivered 21% dividend growth per year on average over the past ten years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
Should investors buy Atea for the upcoming dividend? Atea has been steadily growing its earnings per share, and it is paying out just 37% of its cash flow but an uncomfortably high 138% of its income. Overall, it's hard to get excited about Atea from a dividend perspective.
Curious what other investors think of Atea? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.