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Could Lamar Advertising Company (REIT) (NASDAQ:LAMR) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.
With a five-year payment history and a 4.7% yield, many investors probably find Lamar Advertising Company (REIT) intriguing. It sure looks interesting on these metrics - but there's always more to the story . Some simple research can reduce the risk of buying Lamar Advertising Company (REIT) for its dividend - read on to learn more.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Lamar Advertising Company (REIT) paid out 80% of its profit as dividends, over the trailing twelve month period. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 93% of its free cash flow as dividends last year, which is adequate, but reduces the wriggle room in the event of a downturn. 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.
REITs like Lamar Advertising Company (REIT) often have different rules governing their distributions, so a higher payout ratio on its own is not unusual.
Is Lamar Advertising Company (REIT)'s Balance Sheet Risky?
As Lamar Advertising Company (REIT) has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). Lamar Advertising Company (REIT) has net debt of 4.22 times its EBITDA, which is getting towards the limit of most investors' comfort zones. Judicious use of debt can enhance shareholder returns, but also adds to the risk if something goes awry.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. With EBIT of 3.60 times its interest expense, Lamar Advertising Company (REIT)'s interest cover is starting to look a bit thin.
We update our data on Lamar Advertising Company (REIT) every 24 hours, so you can always get our latest analysis of its financial health, here.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Lamar Advertising Company (REIT) has been paying a dividend for the past five years. During the past five-year period, the first annual payment was US$3.32 in 2014, compared to US$3.84 last year. Dividends per share have grown at approximately 3.0% per year over this time.
We like that the dividend hasn't been shrinking. However we're conscious that the company hasn't got an overly long track record of dividend payments yet, which makes us wary of relying on its dividend income.
Dividend Growth Potential
Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. It's good to see Lamar Advertising Company (REIT) has been growing its earnings per share at 52% a year over the past 5 years. A majority of profits are being paid out as dividends, which raises the question of what happens to the current dividend if earnings decline. However, the rapid growth in earnings may indicate that is less of a risk.
To summarise, shareholders should always check that Lamar Advertising Company (REIT)'s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Lamar Advertising Company (REIT) is paying out an acceptable percentage of its cashflow and profit. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we'd like. Ultimately, Lamar Advertising Company (REIT) comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 6 Lamar Advertising Company (REIT) analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.