Lamb Weston Holdings, Inc. (NYSE:LW) will increase its dividend from last year's comparable payment on the 28th of February to $0.37. Despite this raise, the dividend yield of 2.4% is only a modest boost to shareholder returns.

View our latest analysis for Lamb Weston Holdings

Lamb Weston Holdings' Payment Could Potentially Have Solid Earnings Coverage

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Prior to this announcement, Lamb Weston Holdings' earnings easily covered the dividend, but free cash flows were negative. Since a dividend means the company is paying out cash to investors, this could prove to be a problem in the future.

The next year is set to see EPS grow by 89.0%. If the dividend continues on this path, the payout ratio could be 33% by next year, which we think can be pretty sustainable going forward.

Lamb Weston Holdings Doesn't Have A Long Payment History

It is great to see that Lamb Weston Holdings has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. The annual payment during the last 8 years was $0.75 in 2017, and the most recent fiscal year payment was $1.48. This works out to be a compound annual growth rate (CAGR) of approximately 8.9% a year over that time. Investors will likely want to see a longer track record of growth before making decision to add this to their income portfolio.

Dividend Growth May Be Hard To Come By

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. However, things aren't all that rosy. Lamb Weston Holdings has seen earnings per share falling at 5.8% per year over the last five years. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

Lamb Weston Holdings' Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Lamb Weston Holdings' payments are rock solid. While Lamb Weston Holdings is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Lamb Weston Holdings has 4 warning signs (and 1 which can't be ignored) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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