Leon’s Furniture Limited (TSE:LNF) stock is about to trade ex-dividend in 4 days time. You will need to purchase shares before the 5th of September to receive the dividend, which will be paid on the 7th of October.
Leon’s Furniture’s next dividend payment will be CA$0.14 per share. Last year, in total, the company distributed CA$0.56 to shareholders. Based on the last year’s worth of payments, Leon’s Furniture has a trailing yield of 3.6% on the current stock price of CA$15.72. If you buy this business for its dividend, you should have an idea of whether Leon’s Furniture’s dividend is reliable and sustainable. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. That’s why it’s good to see Leon’s Furniture paying out a modest 40% of its earnings. A useful secondary check can be to evaluate whether Leon’s Furniture generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 28% of the free cash flow it generated, which is a comfortable payout ratio.
It’s positive to see that Leon’s Furniture’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?
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. This is why it’s a relief to see Leon’s Furniture earnings per share are up 7.5% per annum over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, ten years ago, Leon’s Furniture has lifted its dividend by approximately 7.2% a year on average. We’re glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
Has Leon’s Furniture got what it takes to maintain its dividend payments? Earnings per share growth has been growing somewhat, and Leon’s Furniture is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Leon’s Furniture is halfway there. It’s a promising combination that should mark this company worthy of closer attention.
Ever wonder what the future holds for Leon’s Furniture? See what the two analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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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. Thank you for reading.