Loblaw Companies Limited (TSE:L) stock is about to trade ex-dividend in 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase Loblaw Companies' shares on or after the 13th of September will not receive the dividend, which will be paid on the 1st of October.

The company's next dividend payment will be CA$0.513 per share, on the back of last year when the company paid a total of CA$2.05 to shareholders. Calculating the last year's worth of payments shows that Loblaw Companies has a trailing yield of 1.2% on the current share price of CA$174.25. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Loblaw Companies can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Loblaw Companies

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Loblaw Companies paid out a comfortable 28% 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. Luckily it paid out just 16% of its free cash flow last year.

It's positive to see that Loblaw Companies's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends. historic-dividend

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. That's why it's comforting to see Loblaw Companies's earnings have been skyrocketing, up 29% per annum for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Loblaw Companies has lifted its dividend by approximately 7.9% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Is Loblaw Companies an attractive dividend stock, or better left on the shelf? Loblaw Companies 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. It's a promising combination that should mark this company worthy of closer attention.

In light of that, while Loblaw Companies has an appealing dividend, it's worth knowing the risks involved with this stock. To that end, you should learn about the 2 warning signs we've spotted with Loblaw Companies (including 1 which is concerning).

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.