Lovisa Holdings Limited (ASX:LOV) has announced that on 19th of October, it will be paying a dividend ofA$0.31, which a reduction from last year's comparable dividend. This means that the annual payment is 3.4% of the current stock price, which is lower than what the rest of the industry is paying.

Check out our latest analysis for Lovisa Holdings

Lovisa Holdings' Payment Has Solid Earnings Coverage

If it is predictable over a long period, even low dividend yields can be attractive. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. This situation certainly isn't ideal, and could place significant strain on the balance sheet if it continues.

The next year is set to see EPS grow by 84.2%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 74% which brings it into quite a comfortable range. historic-dividend

Lovisa Holdings' Dividend Has Lacked Consistency

Lovisa Holdings has been paying dividends for a while, but the track record isn't stellar. This suggests that the dividend might not be the most reliable. The annual payment during the last 9 years was A$0.133 in 2014, and the most recent fiscal year payment was A$0.69. This works out to be a compound annual growth rate (CAGR) of approximately 20% a year over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

Dividend Growth Could Be Constrained

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Lovisa Holdings has impressed us by growing EPS at 13% per year over the past five years. However, the company isn't reinvesting a lot back into the business, so we would expect the growth rate to slow down somewhat in the future.

Lovisa Holdings' Dividend Doesn't Look Sustainable

Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. Strong earnings growth means Lovisa Holdings has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 1 warning sign for Lovisa Holdings that investors need to be conscious of moving forward. Is Lovisa Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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