Dividend Investors: Don't Be Too Quick To Buy Lesico Ltd. (TLV:LSCO) For Its Upcoming Dividend

It looks like Lesico Ltd. (TLV:LSCO) is about to go ex-dividend in the next 3 days. If you purchase the stock on or after the 22nd of June, you won't be eligible to receive this dividend, when it is paid on the 30th of June.

Lesico's upcoming dividend is ₪0.066 a share, following on from the last 12 months, when the company distributed a total of ₪0.07 per share to shareholders. Last year's total dividend payments show that Lesico has a trailing yield of 1.5% on the current share price of ₪4.603. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Lesico

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 Lesico paid out 94% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. Thankfully its dividend payments took up just 48% of the free cash flow it generated, which is a comfortable payout ratio.

It's good to see that while Lesico'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.

Click here to see how much of its profit Lesico paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. 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 Lesico's earnings per share have dropped 21% 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. Lesico has seen its dividend decline 6.5% per annum on average over the past two years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

Should investors buy Lesico for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 94% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Lesico.

With that being said, if you're still considering Lesico as an investment, you'll find it beneficial to know what risks this stock is facing. To that end, you should learn about the 5 warning signs we've spotted with Lesico (including 1 which doesn't sit too well with us).

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.

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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. Thank you for reading.