LSI Industries Inc. (NASDAQ:LYTS) stock is about to trade ex-dividend in 2 days time. Investors can purchase shares before the 14th of February in order to be eligible for this dividend, which will be paid on the 26th of February.
LSI Industries's next dividend payment will be US$0.05 per share, and in the last 12 months, the company paid a total of US$0.20 per share. Looking at the last 12 months of distributions, LSI Industries has a trailing yield of approximately 3.0% on its current stock price of $6.56. 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 check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. LSI Industries paid out 134% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 23% of its free cash flow as dividends last year, which is conservatively low.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and LSI Industries fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see LSI Industries has grown its earnings rapidly, up 31% a year for the past five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. It looks like the LSI Industries dividends are largely the same as they were ten years ago.
The Bottom Line
Should investors buy LSI Industries for the upcoming dividend? Earnings per share have been rising nicely although, even though its cashflow payout ratio is low, we question why LSI Industries is paying out so much of its profit. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of LSI Industries's dividend merits.
Want to learn more about LSI Industries? 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.
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