Stock Analysis

Linamar (TSE:LNR) Has Announced A Dividend Of CA$0.20

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TSX:LNR
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The board of Linamar Corporation (TSE:LNR) has announced that it will pay a dividend of CA$0.20 per share on the 2nd of December. This means the annual payment will be 1.3% of the current stock price, which is lower than the industry average.

Our analysis indicates that LNR is potentially undervalued!

Linamar's Payment Has Solid Earnings Coverage

If it is predictable over a long period, even low dividend yields can be attractive. Before making this announcement, Linamar was easily earning enough to cover the dividend. This means that most of its earnings are being retained to grow the business.

EPS is set to fall by 5.3% over the next 12 months if recent trends continue. Assuming the dividend continues along recent trends, we believe the payout ratio could be 15%, which we are pretty comfortable with and we think is feasible on an earnings basis.

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TSX:LNR Historic Dividend November 13th 2022

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the dividend has gone from CA$0.32 total annually to CA$0.80. This means that it has been growing its distributions at 9.6% per annum over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Linamar might have put its house in order since then, but we remain cautious.

Dividend Growth Is Doubtful

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though Linamar's EPS has declined at around 5.3% a year. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits.

Our Thoughts On Linamar's Dividend

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. To that end, Linamar has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about. Is Linamar not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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