Should You Buy Livestock Improvement Corporation Limited (NZSE:LIC) For Its Upcoming Dividend?

Readers hoping to buy Livestock Improvement Corporation Limited (NZSE:LIC) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Therefore, if you purchase Livestock Improvement's shares on or after the 31st of July, you won't be eligible to receive the dividend, when it is paid on the 15th of August.

The company's upcoming dividend is NZ$0.1222158 a share, following on from the last 12 months, when the company distributed a total of NZ$0.058 per share to shareholders. Looking at the last 12 months of distributions, Livestock Improvement has a trailing yield of approximately 6.1% on its current stock price of NZ$0.95. If you buy this business for its dividend, you should have an idea of whether Livestock Improvement's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

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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. Livestock Improvement paid out more than half (56%) of its earnings last year, which is a regular payout ratio for most companies. 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. Thankfully its dividend payments took up just 28% of the free cash flow it generated, which is a comfortable payout ratio.

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.

Check out our latest analysis for Livestock Improvement

Click here to see how much of its profit Livestock Improvement paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Livestock Improvement earnings per share are up 8.3% per annum over the last five years. Decent historical earnings per share growth suggests Livestock Improvement has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Livestock Improvement has lifted its dividend by approximately 1.4% a year on average.

To Sum It Up

Is Livestock Improvement worth buying for its dividend? While earnings per share growth has been modest, Livestock Improvement's dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its free cash flow. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

In light of that, while Livestock Improvement has an appealing dividend, it's worth knowing the risks involved with this stock. To help with this, we've discovered 5 warning signs for Livestock Improvement (2 can't be ignored!) that you ought to be aware of before buying the shares.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.