It looks like Louisiana-Pacific Corporation (NYSE:LPX) is about to go ex-dividend in the next four days. This means that investors who purchase shares on or after the 13th of August will not receive the dividend, which will be paid on the 1st of September.
Louisiana-Pacific's next dividend payment will be US$0.14 per share, on the back of last year when the company paid a total of US$0.58 to shareholders. Based on the last year's worth of payments, Louisiana-Pacific stock has a trailing yield of around 1.8% on the current share price of $31.39. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year, Louisiana-Pacific paid out 380% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. A useful secondary check can be to evaluate whether Louisiana-Pacific generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 41% of the free cash flow it generated, which is a comfortable payout ratio.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Louisiana-Pacific fortunately did generate enough cash to fund its dividend. 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.
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 Louisiana-Pacific has grown its earnings rapidly, up 23% a year for the past five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, two years ago, Louisiana-Pacific has lifted its dividend by approximately 5.6% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Louisiana-Pacific is keeping back more of its profits to grow the business.
The Bottom Line
Has Louisiana-Pacific got what it takes to maintain its dividend payments? It's good to see earnings per share growing and low cashflow payout ratio, although we're uncomfortable with Louisiana-Pacific's paying out such a high percentage of its profit. In summary, it's hard to get excited about Louisiana-Pacific from a dividend perspective.
In light of that, while Louisiana-Pacific has an appealing dividend, it's worth knowing the risks involved with this stock. For example - Louisiana-Pacific has 4 warning signs 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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