Lovisa Holdings' (ASX:LOV) Dividend Will Be Increased To AU$0.37

Lovisa Holdings Limited's (ASX:LOV) dividend will be increasing to AU$0.37 on 21st of April. Despite this raise, the dividend yield of 2.8% is only a modest boost to shareholder returns.

Check out our latest analysis for Lovisa Holdings

Lovisa Holdings Doesn't Earn Enough To Cover Its Payments

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Before making this announcement, Lovisa Holdings' dividend was higher than its profits, but the free cash flows quite comfortably covered it. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

The next 12 months is set to see EPS grow by 40.2%. However, if the dividend continues growing along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 122% over the next year.

Lovisa Holdings' Dividend Has Lacked Consistency

Looking back, Lovisa Holdings' dividend hasn't been particularly consistent. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. Since 2015, the dividend has gone from AU$0.13 to AU$0.36. This means that it has been growing its distributions at 15% per annum over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

Lovisa Holdings' Dividend Might Lack Growth

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Lovisa Holdings has seen EPS rising for the last five years, at 12% per annum. While EPS is growing at a decent rate, but future growth could be limited by the amount of earnings being paid out to shareholders.

Our Thoughts On Lovisa Holdings' Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We would be a touch cautious of relying on this stock primarily for the dividend income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Earnings growth generally bodes well for the future value of company dividend payments. See if the 10 Lovisa Holdings analysts we track are forecasting continued growth with our free report on analyst estimates for the company. Is Lovisa Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.