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It looks like LCI Industries (NYSE:LCII) is about to go ex-dividend in the next four days. If you purchase the stock on or after the 3rd of December, you won't be eligible to receive this dividend, when it is paid on the 18th of December.
LCI Industries's next dividend payment will be US$0.75 per share, and in the last 12 months, the company paid a total of US$3.00 per share. Based on the last year's worth of payments, LCI Industries stock has a trailing yield of around 2.3% on the current share price of $127.71. If you buy this business for its dividend, you should have an idea of whether LCI Industries's dividend is reliable and sustainable. So we need to investigate whether LCI Industries can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. LCI Industries paid out a comfortable 49% of its profit last year. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Thankfully its dividend payments took up just 29% of the free cash flow it generated, which is a comfortable payout ratio.
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?
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we're glad to see LCI Industries's earnings per share have risen 16% per annum over the last five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. LCI Industries has delivered 6.0% dividend growth per year on average over the past seven years. Earnings per share have been growing much quicker than dividends, potentially because LCI Industries is keeping back more of its profits to grow the business.
The Bottom Line
Has LCI Industries got what it takes to maintain its dividend payments? LCI Industries has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. There's a lot to like about LCI Industries, and we would prioritise taking a closer look at it.
In light of that, while LCI Industries has an appealing dividend, it's worth knowing the risks involved with this stock. In terms of investment risks, we've identified 2 warning signs with LCI Industries and understanding them should be part of your investment process.
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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