Is It Worth Considering Lycopodium Limited (ASX:LYL) For Its Upcoming Dividend?
Simply Wall St
4 min read
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Lycopodium Limited (ASX:LYL) is about to trade ex-dividend in the next 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Lycopodium's shares before the 21st of September in order to receive the dividend, which the company will pay on the 6th of October.
The company's next dividend payment will be AU$0.45 per share. Last year, in total, the company distributed AU$0.90 to shareholders. Looking at the last 12 months of distributions, Lycopodium has a trailing yield of approximately 8.7% on its current stock price of A$10.31. If you buy this business for its dividend, you should have an idea of whether Lycopodium'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 out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Lycopodium is paying out an acceptable 69% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Lycopodium generated enough free cash flow to afford its dividend. Lycopodium paid out more free cash flow than it generated - 199%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Lycopodium does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
Lycopodium paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Lycopodium to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
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. That's why it's comforting to see Lycopodium's earnings have been skyrocketing, up 20% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Lycopodium has lifted its dividend by approximately 11% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
To Sum It Up
From a dividend perspective, should investors buy or avoid Lycopodium? It's good to see that earnings per share are growing and that the company's payout ratio is within a normal range for most businesses. However we're somewhat concerned that it paid out 199% of its cashflow, which is uncomfortably high. Overall, it's hard to get excited about Lycopodium from a dividend perspective.
However if you're still interested in Lycopodium as a potential investment, you should definitely consider some of the risks involved with Lycopodium. For example, we've found 1 warning sign for Lycopodium that we recommend you consider before investing in the business.
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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.
