Stock Analysis

Be Sure To Check Out Loblaw Companies Limited (TSE:L) Before It Goes Ex-Dividend

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TSX:L
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It looks like Loblaw Companies Limited (TSE:L) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 12th of March will not receive this dividend, which will be paid on the 1st of April.

Loblaw Companies's next dividend payment will be CA$0.34 per share. Last year, in total, the company distributed CA$1.34 to shareholders. Based on the last year's worth of payments, Loblaw Companies stock has a trailing yield of around 2.1% on the current share price of CA$64.7. 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! As a result, readers should always check whether Loblaw Companies has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Loblaw Companies

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. Loblaw Companies paid out a comfortable 42% of its profit last year. A useful secondary check can be to evaluate whether Loblaw Companies generated enough free cash flow to afford its dividend. The good news is it paid out just 14% of its free cash flow in the last year.

It's positive to see that Loblaw Companies'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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
TSX:L Historic Dividend March 7th 2021

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Loblaw Companies's earnings per share have been growing at 17% a year for the past five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Loblaw Companies has increased its dividend at approximately 4.8% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

Final Takeaway

Is Loblaw Companies an attractive dividend stock, or better left on the shelf? Loblaw Companies has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. Loblaw Companies looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

In light of that, while Loblaw Companies has an appealing dividend, it's worth knowing the risks involved with this stock. In terms of investment risks, we've identified 2 warning signs with Loblaw Companies and understanding them should be part of your investment process.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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About TSX:L

Loblaw Companies

Loblaw Companies Limited, a food and pharmacy company, engages in the grocery, pharmacy, health and beauty, apparel, general merchandise, financial services, and wireless mobile products and services businesses in Canada.

Solid track record with adequate balance sheet and pays a dividend.