Lamb Weston Holdings (NYSE:LW) Is Paying Out A Larger Dividend Than Last Year

The board of Lamb Weston Holdings, Inc. (NYSE:LW) has announced that it will be paying its dividend of $0.37 on the 28th of February, an increased payment from last year's comparable dividend. Despite this raise, the dividend yield of 2.4% is only a modest boost to shareholder returns.

View our latest analysis for Lamb Weston Holdings

Lamb Weston Holdings' Payment Could Potentially Have Solid Earnings Coverage

Even a low dividend yield can be attractive if it is sustained for years on end. Based on the last payment, Lamb Weston Holdings' earnings were much higher than the dividend, but it wasn't converting those earnings into cash flow. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

The next year is set to see EPS grow by 89.0%. Assuming the dividend continues along recent trends, we think the payout ratio could be 33% by next year, which is in a pretty sustainable range.

Lamb Weston Holdings Is Still Building Its Track Record

It is great to see that Lamb Weston Holdings has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. Since 2017, the annual payment back then was $0.75, compared to the most recent full-year payment of $1.48. This implies that the company grew its distributions at a yearly rate of about 8.9% over that duration. Lamb Weston Holdings has a nice track record of dividend growth but we would wait until we see a longer track record before getting too confident.

Dividend Growth Is Doubtful

The company's investors will be pleased to have been receiving dividend income for some time. However, things aren't all that rosy. Over the past five years, it looks as though Lamb Weston Holdings' EPS has declined at around 5.8% a year. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.

Lamb Weston Holdings' Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think Lamb Weston Holdings will make a great income stock. While Lamb Weston Holdings is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.

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. For example, we've identified 4 warning signs for Lamb Weston Holdings (1 is a bit unpleasant!) that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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