Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Lycopodium Limited (ASX:LYL) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 24th of September to receive the dividend, which will be paid on the 9th of October.
Lycopodium's next dividend payment will be AU$0.05 per share, on the back of last year when the company paid a total of AU$0.10 to shareholders. Based on the last year's worth of payments, Lycopodium stock has a trailing yield of around 2.3% on the current share price of A$4.27. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Lycopodium can afford its dividend, and if the dividend could grow.
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. Lycopodium paid out 67% of its earnings to investors last year, a normal payout level for most businesses. 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. Luckily it paid out just 19% of its free cash flow last 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.
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. It's encouraging to see Lycopodium has grown its earnings rapidly, up 36% a year for the past five years. Management appears to be striking a nice balance between reinvesting for growth and paying dividends to shareholders. With a reasonable payout ratio, profits being reinvested, and some earnings growth, Lycopodium could have strong prospects for future increases to the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Lycopodium has seen its dividend decline 8.8% per annum on average over the past 10 years, which is not great to see. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.
Should investors buy Lycopodium for the upcoming dividend? Lycopodium's growing earnings per share and conservative payout ratios make for a decent combination. We also like that it paid out a lower percentage of its cash flow. Lycopodium looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
So while Lycopodium looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example - Lycopodium has 1 warning sign we think you should be aware of.
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.
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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