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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Louisiana-Pacific Corporation (NYSE:LPX) is about to trade ex-dividend in the next four days. This means that investors who purchase shares on or after the 14th of May will not receive the dividend, which will be paid on the 1st of June.
Louisiana-Pacific's upcoming dividend is US$0.16 a share, following on from the last 12 months, when the company distributed a total of US$0.64 per share to shareholders. Calculating the last year's worth of payments shows that Louisiana-Pacific has a trailing yield of 0.9% on the current share price of $72.73. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Louisiana-Pacific can afford its dividend, and if the dividend could grow.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Louisiana-Pacific paid out just 8.3% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. A useful secondary check can be to evaluate whether Louisiana-Pacific generated enough free cash flow to afford its dividend. The good news is it paid out just 7.4% of its free cash flow in the last year.
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.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Louisiana-Pacific's earnings have been skyrocketing, up 23% per annum for the past five years. With earnings per share growing rapidly and the company sensibly reinvesting almost all of its profits within the business, Louisiana-Pacific looks like a promising growth company.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last three years, Louisiana-Pacific has lifted its dividend by approximately 7.2% 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.
From a dividend perspective, should investors buy or avoid Louisiana-Pacific? We love that Louisiana-Pacific is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. Overall we think this is an attractive combination and worthy of further research.
While it's tempting to invest in Louisiana-Pacific for the dividends alone, you should always be mindful of the risks involved. For instance, we've identified 3 warning signs for Louisiana-Pacific (1 is a bit concerning) you should be aware of.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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. 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.
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