Lancaster Colony Inc (NASDAQ:LANC) raises its dividend to $0.85

Lancaster Colony Society (NASDAQ: LANC) announced that it will increase its periodic dividend on December 30 to $0.85, which will be 6.3% higher than the comparable payout amount of $0.80 last year. Although the dividend is now higher, the yield is only 1.5%, which is below the industry average.

While dividend yield is important for income-oriented investors, it’s also important to account for any large changes in stock price, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Lancaster Colony’s share price is up 41% in the past 3 months, which is good for shareholders and may also explain a lower dividend yield.

Our analysis indicates that LANC is potentially overrated!

Lancaster Colony revenue easily covers distributions

While yield is important, another factor to consider regarding a company’s dividend is whether current payout levels are achievable. Prior to this announcement, Lancaster Colony’s dividend made up a very large portion of earnings and perhaps more worryingly was that it made up 320% of cash flow. Paying out such a high proportion of cash flow may expose the company to having to cut the dividend if the company runs into difficulties.

Over the next year, EPS is expected to increase by 33.3%. Assuming the dividend continues on recent trends, our estimates indicate that the payout ratio could be as high as 75% – on the high side, but we wouldn’t necessarily say that’s not sustainable.

NasdaqGS: LANC Historic Dividend November 17, 2022

Lancaster Colony has a strong track record

The company has a steady history of paying dividends with very little fluctuation. Since 2012, the dividend has gone from $1.44 total annually to $3.20. This implies that the company has increased its distributions at an annual rate of approximately 8.3% over this period. Dividends have been growing at a reasonable pace over this period, and without any major reduction in payout over time, we think this is an attractive combination as it gives yields a good boost for shareholders.

Dividend growth can be hard to achieve

Investors who have held shares of the company for the past few years will be pleased with the dividend income they have received. Let’s not jump to conclusions, because things might not be as good as they seem on the surface. Over the past five years, Lancaster Colony’s earnings per share have declined approximately 2.9% per year. If the company earns less over time, it naturally follows that it will also have to pay fewer dividends. Earnings are expected to grow over the next year, but we will remain cautious until a track record of earnings growth is established.

Dividend could prove unreliable

In summary, while it’s always good to see the dividend increase, we don’t think Lancaster Colony’s payouts are strong. In the past, payouts have been steady, but we think the company is paying too much to keep that going over the long term. We would be a bit cautious to rely on this stock primarily for dividend income.

Companies with a stable dividend policy are likely to enjoy greater investor interest than those that suffer from a more inconsistent approach. Meanwhile, despite the importance of dividend payouts, these are not the only factors our readers should be aware of when evaluating a company. Example: we have identified 4 warning signs for Lancaster Colony (1 of which is potentially serious!) that you should know about. If you are a dividend investor, you can also consult our curated list of high yielding dividend stocks.

Valuation is complex, but we help make it simple.

Find out if Lancaster Colony is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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