Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see James Latham plc (LON:LTHM) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 6th of August will not receive this dividend, which will be paid on the 4th of September.
James Latham’s next dividend payment will be UK£0.10 per share, on the back of last year when the company paid a total of UK£0.15 to shareholders. Calculating the last year’s worth of payments shows that James Latham has a trailing yield of 1.9% on the current share price of £8.2. 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 James Latham 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. James Latham paid out just 25% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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. It paid out more than half (64%) of its free cash flow in the past year, which is within an average range for most companies.
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 earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we’re encouraged by the steady growth at James Latham, with earnings per share up 9.4% on average over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. Therefore it’s unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, James Latham has lifted its dividend by approximately 7.2% a year on average. We’re glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Has James Latham got what it takes to maintain its dividend payments? Earnings per share growth has been modest, and it’s interesting that James Latham is paying out less than half of its earnings and more than half its cash flow to shareholders in the form of dividends. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we’re not all that optimistic on its dividend prospects.
Want to learn more about James Latham? Here’s a visualisation of its historical rate of 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.
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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