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Lamb Weston Holdings, Inc. (NYSE:LW) stock is about to trade ex-dividend in four days. You will need to purchase shares before the 6th of May to receive the dividend, which will be paid on the 4th of June.
Lamb Weston Holdings's next dividend payment will be US$0.23 per share, and in the last 12 months, the company paid a total of US$0.94 per share. Calculating the last year's worth of payments shows that Lamb Weston Holdings has a trailing yield of 1.2% on the current share price of $80.5. If you buy this business for its dividend, you should have an idea of whether Lamb Weston Holdings's dividend is reliable and sustainable. So we need to investigate whether Lamb Weston Holdings can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Lamb Weston Holdings paid out more than half (54%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It distributed 35% of its free cash flow as dividends, a comfortable payout level for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that Lamb Weston Holdings's earnings are effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past four years, Lamb Weston Holdings has increased its dividend at approximately 5.8% a year on average.
To Sum It Up
Is Lamb Weston Holdings worth buying for its dividend? We're not enthused by the flat earnings per share, although at least the company's payout ratio is within reasonable bounds. Additionally, it paid out a lower percentage of its free cash flow, so at least it generated more cash than it spent on dividends. To summarise, Lamb Weston Holdings looks okay on this analysis, although it doesn't appear a stand-out opportunity.
With that being said, if dividends aren't your biggest concern with Lamb Weston Holdings, you should know about the other risks facing this business. To that end, you should learn about the 2 warning signs we've spotted with Lamb Weston Holdings (including 1 which can't be ignored).
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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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