L Brands, Inc. (NYSE:LB) stock is about to trade ex-dividend in 3 days time. You will need to purchase shares before the 22nd of August to receive the dividend, which will be paid on the 6th of September.
L Brands's next dividend payment will be US$0.30 per share, on the back of last year when the company paid a total of US$1.20 to shareholders. Based on the last year's worth of payments, L Brands has a trailing yield of 5.9% on the current stock price of $20.36. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is 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 L Brands paid out 91% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. Dividends consumed 73% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's good to see that while L Brands's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by L Brands's 5.8% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, L Brands has lifted its dividend by approximately 7.2% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. L Brands is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
Is L Brands an attractive dividend stock, or better left on the shelf? Earnings per share have been shrinking in recent times. Additionally, L Brands is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Wondering what the future holds for L Brands? See what the 27 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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