Stock Analysis

Is It Smart To Buy Loblaw Companies Limited (TSE:L) Before It Goes Ex-Dividend?

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TSX:L
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Loblaw Companies Limited (TSE:L) stock is about to trade ex-dividend in 3 days. You will need to purchase shares before the 14th of December to receive the dividend, which will be paid on the 30th of December.

Loblaw Companies's next dividend payment will be CA$0.34 per share, and in the last 12 months, the company paid a total of CA$1.34 per share. Based on the last year's worth of payments, Loblaw Companies stock has a trailing yield of around 2.0% on the current share price of CA$65.82. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Loblaw Companies

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. That's why it's good to see Loblaw Companies paying out a modest 45% of its earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 13% of its free cash flow as dividends last year, which is conservatively low.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

historic-dividend
TSX:L Historic Dividend December 10th 2020

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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Loblaw Companies has grown its earnings rapidly, up 82% a year for the past five years. Loblaw Companies is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. 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.

So while Loblaw Companies looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example - Loblaw Companies has 1 warning sign we think you should be aware of.

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.