Should Income Investors Look At Lincoln Electric Holdings, Inc. (NASDAQ:LECO) Before Its Ex-Dividend?

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Lincoln Electric Holdings, Inc. (NASDAQ:LECO) is about to go ex-dividend in just 4 days. This means that investors who purchase shares on or after the 29th of September will not receive the dividend, which will be paid on the 15th of October.

Lincoln Electric Holdings's next dividend payment will be US$0.49 per share, on the back of last year when the company paid a total of US$1.96 to shareholders. Based on the last year's worth of payments, Lincoln Electric Holdings stock has a trailing yield of around 2.2% on the current share price of $87.64. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Lincoln Electric Holdings

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Lincoln Electric Holdings is paying out an acceptable 54% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Lincoln Electric Holdings generated enough free cash flow to afford its dividend. Fortunately, it paid out only 37% of its free cash flow in the past year.

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.

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Lincoln Electric Holdings, with earnings per share up 2.4% on average over the last five years. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Lincoln Electric Holdings has lifted its dividend by approximately 13% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Is Lincoln Electric Holdings worth buying for its dividend? While earnings per share growth has been modest, Lincoln Electric Holdings's dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its free cash flow. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

While it's tempting to invest in Lincoln Electric Holdings for the dividends alone, you should always be mindful of the risks involved. Every company has risks, and we've spotted 2 warning signs for Lincoln Electric Holdings you should know about.

If you're in the market for dividend stocks, we recommend checking our list of top 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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