The Lottery Company Limited (ASX:TLC) will increase its dividend on September 25 from last year’s payout to A$0.105, giving it a dividend yield of 3.8%, which is above the industry average.

Check out our latest analysis for Lottery

The lottery dividend is well covered by earnings

A high dividend payout over several years doesn’t mean much if it can’t be sustained. Before this announcement, Lottery’s was paying out a fairly large proportion of profits and 94% of free cash flow. This suggests the company is more focused on paying out money to shareholders than growing the business, but we don’t think there are necessarily signs that the dividend might be unsustainable.

Earnings per share are expected to grow by 13.2% next year. Assuming the dividend follows recent trends, we estimate the payout ratio could reach 88% – a rather high figure, but one that we would not necessarily call unsustainable.

The lottery’s dividend payout lacked consistency

Looking back, the company hasn’t paid the most consistent dividend, but with such a short dividend history, it might be too early to draw solid conclusions. The dividend has grown from an annual total of A$0.16 in 2022 to the most recent annual total payment of A$0.185. This means the company has grown its payouts by about 7.5% annually over that period. It’s good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. The Lottery may have gotten its affairs in order since then, but we remain cautious.

Dividend growth prospects are limited

Rising earnings per share could be a mitigating factor when considering past dividend fluctuations. However, Lottery’s earnings per share have been virtually flat over the past three years, which could prevent the company from paying out more each year. Earnings are not growing quickly at all, and the company pays out most of its earnings as dividends. When the return on reinvestment opportunities falls below a certain minimum level, companies often choose to pay out a higher dividend instead. This is why many established companies often have higher dividend yields.

In summary

Overall, this is probably not a great dividend stock, even if the dividend is currently being increased. The payments are too high to be considered sustainable and the track record is not the best. Overall, we don’t think this company has what it takes to be a good dividend stock.

Investors generally prefer companies with a consistent, stable dividend policy over companies with irregular dividend policies. At the same time, there are other factors that our readers should consider before putting capital into a stock. For example, we have selected 2 warning signs for lottery investors should consider. Is lottery not quite the opportunity you have been looking for? Check out our Selection of the highest dividend stocks.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.