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Don't Race Out To Buy Lovisa Holdings Limited (ASX:LOV) Just Because It's Going Ex-Dividend

Simply Wall St

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 Lovisa Holdings Limited (ASX:LOV) is about to go ex-dividend in just 4 days. You will need to purchase shares before the 11th of September to receive the dividend, which will be paid on the 24th of October.

Lovisa Holdings's next dividend payment will be AU$0.15 per share, and in the last 12 months, the company paid a total of AU$0.33 per share. Based on the last year's worth of payments, Lovisa Holdings has a trailing yield of 2.6% on the current stock price of A$12.65. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Lovisa Holdings

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. Last year, Lovisa Holdings paid out 94% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Lovisa Holdings paid out more free cash flow than it generated - 153%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

As Lovisa Holdings's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

ASX:LOV Historical Dividend Yield, September 6th 2019

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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Lovisa Holdings's earnings have been skyrocketing, up 52% per annum for the past five years. Earnings per share are increasing at a rapid rate, but the company is paying out more than we are comfortable with, based on current earnings. Fast-growing businesses normally need to reinvest most of their earnings in order to maintain growth, so we'd suspect that either earnings growth will slow or the dividend may not be increased for a while.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Lovisa Holdings has delivered 42% dividend growth per year on average over the past 4 years. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

The Bottom Line

Should investors buy Lovisa Holdings for the upcoming dividend? While it's nice to see earnings per share growing, we're curious about how Lovisa Holdings intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. Bottom line: Lovisa Holdings has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Wondering what the future holds for Lovisa Holdings? See what the five analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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 editorial-team@simplywallst.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.