Lamb Weston Holdings (NYSE:LW) Has Announced That It Will Be Increasing Its Dividend To $0.36

Lamb Weston Holdings, Inc. (NYSE:LW) will increase its dividend from last year's comparable payment on the 1st of March to $0.36. Even though the dividend went up, the yield is still quite low at only 1.3%.

Check out our latest analysis for Lamb Weston Holdings

Lamb Weston Holdings' Earnings Easily Cover The Distributions

If it is predictable over a long period, even low dividend yields can be attractive. Prior to this announcement, Lamb Weston Holdings' dividend was only 14% of earnings, however it was paying out 103,948% of free cash flows. While the business may be attempting to set a balanced dividend policy, a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

EPS is set to fall by 2.9% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could be 17%, which we are pretty comfortable with and we think is feasible on an earnings basis.

Lamb Weston Holdings Doesn't Have A Long Payment History

Even though the company has been paying a consistent dividend for a while, we would like to see a few more years before we feel comfortable relying on it. Since 2017, the annual payment back then was $0.75, compared to the most recent full-year payment of $1.44. This means that it has been growing its distributions at 9.8% per annum over that time. Lamb Weston Holdings has been growing its dividend at a decent rate, and the payments have been stable. However, the payment history is very short, so there is no evidence yet that the dividend can be sustained over a full economic cycle.

The Dividend Looks Likely To Grow

The company's investors will be pleased to have been receiving dividend income for some time. Lamb Weston Holdings has seen EPS rising for the last five years, at 19% per annum. With a decent amount of growth and a low payout ratio, we think this bodes well for Lamb Weston Holdings' prospects of growing its dividend payments in the future.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We don't think Lamb Weston Holdings is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Lamb Weston Holdings has 2 warning signs (and 1 which is potentially serious) we think you should know about. Is Lamb Weston Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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