Dividend paying stocks like Reach Subsea ASA (OB:REACH) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
Some readers mightn't know much about Reach Subsea's 4.1% dividend, as it has only been paying distributions for a year or so. Some simple analysis can reduce the risk of holding Reach Subsea for its dividend, and we'll focus on the most important aspects below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although it reported a loss over the past 12 months, Reach Subsea currently pays a dividend. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.
Reach Subsea's cash payout ratio last year was 4.1%, which is quite low and suggests that the dividend was thoroughly covered by cash flow.
With a strong net cash balance, Reach Subsea investors may not have much to worry about in the near term from a dividend perspective.
We update our data on Reach Subsea every 24 hours, so you can always get our latest analysis of its financial health, here.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. This company has been paying a dividend for less than 2 years, which we think is too soon to consider it a reliable dividend stock. Its most recent annual dividend was kr0.07 per share.
It's good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn't want to depend on this dividend too heavily.
Dividend Growth Potential
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Reach Subsea's EPS have fallen by approximately 45% per year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Reach Subsea's earnings per share, which support the dividend, have been anything but stable.
We'd also point out that Reach Subsea issued a meaningful number of new shares in the past year. 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.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're not keen on the fact that Reach Subsea paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Earnings per share are down, and to our mind Reach Subsea has not been paying a dividend long enough to demonstrate its resilience across economic cycles. In summary, Reach Subsea has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.
See if management have their own wealth at stake, by checking insider shareholdings in Reach Subsea stock.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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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.