Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that London Security plc (LON:LSC) is about to go ex-dividend in just 3 days. If you purchase the stock on or after the 31st of October, you won't be eligible to receive this dividend, when it is paid on the 28th of November.
London Security's next dividend payment will be UK£0.4 per share. Last year, in total, the company distributed UK£0.8 to shareholders. Last year's total dividend payments show that London Security has a trailing yield of 3.7% on the current share price of £21.6. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether London Security has been able to grow its dividends, or if the dividend might be cut.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see London Security paying out a modest 30% of its earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out more than half (66%) of its free cash flow in the past year, which is within an average range for most companies.
It's positive to see that London Security's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at London Security, with earnings per share up 3.5% on average over the last five years. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last eight years, London Security has lifted its dividend by approximately 21% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Has London Security got what it takes to maintain its dividend payments? Earnings per share have been growing at a steady rate, and London Security paid out less than half its profits and more than half its free cash flow as dividends over the last year. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
Want to learn more about London Security's dividend performance? Check out this visualisation of its historical revenue and earnings growth.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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