Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Lam Research Corporation (NASDAQ:LRCX) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 24th of March will not receive this dividend, which will be paid on the 8th of April.
Lam Research’s next dividend payment will be US$1.15 per share, and in the last 12 months, the company paid a total of US$4.60 per share. Last year’s total dividend payments show that Lam Research has a trailing yield of 2.4% on the current share price of $194.14. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Lam Research has been able to grow its dividends, or if the dividend might be cut.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Lam Research paid out a comfortable 32% of its profit last year. 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. Fortunately, it paid out only 28% of its free cash flow in the past year.
It’s positive to see that Lam Research’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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 fall far enough, the company could be forced to cut its dividend. It’s encouraging to see Lam Research has grown its earnings rapidly, up 30% a year for the past five years. Lam Research is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the last six years, Lam Research has lifted its dividend by approximately 36% a year on average. It’s great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
Is Lam Research an attractive dividend stock, or better left on the shelf? We love that Lam Research is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. There’s a lot to like about Lam Research, and we would prioritise taking a closer look at it.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. In terms of investment risks, we’ve identified 3 warning signs with Lam Research and understanding them should be part of your investment process.
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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