Yahoo Finance Is L'Oréal S.A.'s (EPA:OR) 1.5% Dividend Worth Your Time?
Today we'll take a closer look at L'Oréal S.A. (EPA:OR) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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.
A 1.5% yield is nothing to get excited about, but investors probably think the long payment history suggests L'Oréal has some staying power. Some simple analysis can reduce the risk of holding L'Oréal for its dividend, and we'll focus on the most important aspects below.
Explore this interactive chart for our latest analysis on L'Oréal!
Payout ratios
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 55% of L'Oréal's profits were paid out as dividends in the last 12 months. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. L'Oréal paid out 52% of its cash flow as dividends last year, which is within a reasonable range for the average corporation. It's positive to see that L'Oréal'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.
While the above analysis focuses on dividends relative to a company's earnings, we do note L'Oréal's strong net cash position, which will let it pay larger dividends for a time, should it choose.
Consider getting our latest analysis on L'Oréal's financial position here.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of L'Oréal's dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was €1.44 in 2010, compared to €3.85 last year. Dividends per share have grown at approximately 10% per year over this time.
It's rare to find a company that has grown its dividends rapidly over ten years and not had any notable cuts, but L'Oréal has done it, which we really like.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. L'Oréal has grown its earnings per share at 7.9% per annum over the past five years. The rate at which earnings have grown is quite decent, and by paying out more than half of its earnings as dividends, the company is striking a reasonable balance between reinvestment and returns to shareholders.
Conclusion
To summarise, shareholders should always check that L'Oréal's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. L'Oréal's is paying out more than half its income as dividends, but at least the dividend is covered by both reported earnings and cashflow. Earnings growth has been limited, but we like that the dividend payments have been fairly consistent. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than L'Oréal out there.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 26 L'Oréal analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
