Are Dividend Investors Getting More Than They Bargained For With Lesico Ltd.'s (TLV:LSCO) Dividend?

Today we'll take a closer look at Lesico Ltd. (TLV:LSCO) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With only a three-year payment history, and a 1.4% yield, investors probably think Lesico is not much of a dividend stock. While it may not look like much, if earnings are growing it could become quite interesting. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

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Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Lesico paid out 43% of its profit as dividends, over the trailing twelve month period. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Plus, there is room to increase the payout ratio over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Last year, Lesico paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

With a strong net cash balance, Lesico investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Lesico's financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. This company's dividend has been unstable, and with a relatively short history, we think it's a little soon to draw strong conclusions about its long term dividend potential. During the past three-year period, the first annual payment was ₪0.08 in 2018, compared to ₪0.07 last year. The dividend has shrunk at around 4.4% a year during that period. Lesico's dividend has been cut sharply at least once, so it hasn't fallen by 4.4% every year, but this is a decent approximation of the long term change.

A shrinking dividend over a three-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

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. Lesico's EPS have fallen by approximately 21% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Lesico's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Lesico's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we like Lesico's low dividend payout ratio, although we're a bit concerned that it paid out a substantially higher percentage of its free cash flow. Earnings per share are down, and Lesico's dividend has been cut at least once in the past, which is disappointing. In summary, Lesico has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 6 warning signs for Lesico (3 shouldn't be ignored!) that you should be aware of before investing.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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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. 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.
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