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Why You Should Leave LSL Property Services plc (LON:LSL)'s Upcoming Dividend On The Shelf

Simply Wall St

It looks like LSL Property Services plc (LON:LSL) is about to go ex-dividend in the next 3 days. Investors can purchase shares before the 8th of August in order to be eligible for this dividend, which will be paid on the 16th of September.

LSL Property Services's next dividend payment will be UK£0.04 per share, and in the last 12 months, the company paid a total of UK£0.11 per share. Calculating the last year's worth of payments shows that LSL Property Services has a trailing yield of 5.5% on the current share price of £1.975. If you buy this business for its dividend, you should have an idea of whether LSL Property Services's dividend is reliable and sustainable. So we need to investigate whether LSL Property Services can afford its dividend, and if the dividend could grow.

See our latest analysis for LSL Property Services

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. LSL Property Services paid out 114% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out more than half (55%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while LSL Property Services's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

LSE:LSL Historical Dividend Yield, August 4th 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see LSL Property Services's earnings per share have dropped 6.8% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. LSL Property Services's dividend payments are broadly unchanged compared to where they were nine years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

To Sum It Up

Has LSL Property Services got what it takes to maintain its dividend payments? Earnings per share have been in decline, which is not encouraging. Worse, LSL Property Services's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not that we think LSL Property Services is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Curious what other investors think of LSL Property Services? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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.

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. Thank you for reading.