3/11/25
Lamb Weston Holdings (LW) is a well-known name in the frozen potato business, supplying everything from basic fries to premium products to restaurants and grocery stores worldwide. As a major player in the food industry, the company has long been a reliable performer, but recent challenges have sent the stock tumbling. Over the past year, the share price has dropped significantly, hitting lows near $49.28 after peaking at $107.50.
For dividend investors, the big question is whether this downturn presents an opportunity or if the company’s financials suggest there could be trouble ahead. Let’s take a closer look at its dividend strength, financial stability, and overall valuation to see if LW still fits within a dividend-focused portfolio.
Key Dividend Metrics
📌 Dividend Yield: 2.82% (Forward)
📌 Annual Dividend: $1.48 per share
📌 Payout Ratio: 56.69%
📌 5-Year Average Dividend Yield: 1.39%
📌 Dividend Growth: Moderate, but requires monitoring
📌 Ex-Dividend Date: January 31, 2025
📌 Next Dividend Payment: February 28, 2025
Dividend Overview
Lamb Weston currently offers a forward dividend yield of 2.82%, which is higher than its five-year average of 1.39%. This jump in yield isn’t necessarily due to strong dividend growth but rather the stock’s price decline. When a stock falls significantly, the dividend yield rises, making it appear more attractive to income investors.
The payout ratio of 56.69% suggests that over half of the company’s earnings are going toward dividends. While that’s not dangerously high, it does indicate that the company has less room for dividend increases unless earnings grow. For now, the dividend appears sustainable, but future increases will depend on the company’s ability to stabilize revenue and cash flow.
Dividend Growth and Safety
LW has maintained a steady dividend payout over the years, but it hasn’t been known for rapid growth in its distributions. The real concern here isn’t whether the company has paid consistent dividends—it has—but rather whether it will be able to continue doing so comfortably in the future.
One area of concern is its debt load. With over $4 billion in total debt and a debt-to-equity ratio of 251.72%, the company is carrying a significant amount of leverage. While borrowing is common in the food industry, this level of debt could limit its ability to fund dividend growth or even maintain the current payout if earnings decline further.
Another worrying sign is the company’s negative levered free cash flow of -$195.1 million. This means that after covering its financial obligations, LW is actually burning cash rather than generating excess funds. If this continues, management may have to make tough decisions regarding capital allocation, which could impact dividends in the long run.
Chart Analysis
The stock chart for Lamb Weston (LW) tells a story of a prolonged downtrend with a few moments of temporary relief. The price has been consistently declining, with both short-term and long-term moving averages reinforcing the bearish sentiment. Let’s break down what’s happening on this chart.
Trend and Moving Averages
The 50-day moving average (orange line) has been sloping downward for quite some time, indicating that short-term momentum remains weak. The 200-day moving average (blue line) is also trending lower, confirming that the stock is in a well-established long-term downtrend.
A significant drop occurred earlier in the year, followed by a brief attempt at recovery. However, the stock failed to reclaim previous highs and has continued its decline. Currently, the price remains well below both moving averages, showing that there hasn’t been a meaningful shift in trend direction yet.
Volume and Market Activity
Volume spikes tell us where the market has shown interest. There were some heavy selling days, particularly during the large price drops, suggesting institutional or large-scale selling pressure. More recently, volume appears to have leveled off, but there hasn’t been a strong surge of buyers stepping in to reverse the trend.
Relative Strength Index (RSI)
The RSI, displayed in the lower panel, has been hovering in the oversold region for a prolonged period. There was a slight uptick recently, but it hasn’t yet crossed into neutral territory, meaning buyers have not fully regained control. This suggests that while the stock may be slightly oversold, there hasn’t been a clear momentum shift in favor of a rebound.
Recent Price Action
Over the last five trading sessions, the stock has been relatively stable but remains near its lows. The wicks on recent candlesticks indicate some buying pressure at the lower levels, but the lack of strong follow-through suggests that sellers are still in control. The stock briefly tested higher levels but struggled to hold onto gains, reinforcing the idea that resistance remains strong.
If the stock continues trading sideways around this level, it could be forming a temporary base. However, without a clear break above key resistance points or an improvement in volume, the downtrend remains intact.
Analyst Ratings
📈 In recent months, Lamb Weston Holdings, Inc. (LW) has experienced a mix of analyst upgrades and downgrades, reflecting different perspectives on the company’s future performance.
Upgrades
🔹 Goldman Sachs: On September 5, 2023, Goldman Sachs raised its price target for Lamb Weston to $127. The firm cited expectations of improved operational efficiency and potential market share gains as key drivers for this upgrade.
🔹 Jefferies: On December 17, 2024, Jefferies increased its price target for Lamb Weston to $95 while maintaining a buy rating. Analysts pointed to the company’s strategic initiatives and anticipated recovery in demand as reasons for the improved outlook.
Downgrades
🔻 Citigroup: On December 20, 2024, Citigroup downgraded Lamb Weston to neutral from buy, adjusting its price target from $90 to $68. Concerns over declining sales and rising manufacturing costs led to the downgrade, as analysts warned of potential margin pressures.
🔻 JPMorgan: On October 7, 2024, JPMorgan also downgraded Lamb Weston to neutral from overweight, revising its price target from $63 to $68. The firm expressed caution about the company’s earnings outlook, citing operational challenges and uncertainty in cost management.
Consensus Price Target
📊 As of the most recent data, the consensus price target for Lamb Weston is approximately $68.45. Individual analyst targets range from a low of $62 to a high of $80. This suggests a cautiously optimistic stance from the analyst community, with expectations of moderate recovery but ongoing concerns about profitability and cost pressures.
Earnings Report Summary
Lamb Weston’s latest earnings report showed some challenges, with sales and profits taking a hit. The company has been dealing with weaker demand, higher costs, and a competitive market, all of which have put pressure on its bottom line.
Sales and Profit Performance
Revenue came in at $1.6 billion for the quarter, down about 8% from the previous year. A big part of this decline came from lower sales volumes, with fewer customers buying their products, particularly in the restaurant sector. Pricing also took a slight dip, which added to the revenue drop.
The bigger issue was net income, which fell sharply. The company posted a net loss of $36.1 million, or $0.25 per share, compared to a solid profit of $215 million the previous year. Even after adjusting for certain costs, earnings per share were still down more than 50%, coming in at $0.66.
Breaking Down the Business Segments
In North America, sales dropped 8% to $1.07 billion. This was largely due to lower restaurant traffic and some lost market share. Pricing was also a factor, with a shift in product mix bringing in less revenue per unit sold.
The international side of the business wasn’t much better. Sales there fell 6% to $528.8 million. Similar to North America, the company saw a decline in sales volume, and a tougher global market made it harder to keep prices strong.
Cost Pressures and Cash Flow
One of the major challenges was higher manufacturing costs. The company has been spending more to produce its products, and with demand weakening, that’s been cutting into profits.
Cash flow remained positive but wasn’t as strong as before. Operating cash flow for the first half of the fiscal year was $429.3 million, which was lower than the same period last year. Capital spending was also down slightly, as the company had already invested in key projects in previous quarters.
Dividends and Share Buybacks
Lamb Weston is still committed to returning cash to shareholders. The company paid out $51.6 million in dividends this quarter and even bumped up its quarterly dividend by a penny to $0.37 per share. Additionally, it expanded its stock buyback program, with $558 million still available for repurchases.
Looking Ahead
Given the challenges, the company lowered its full-year expectations. It now expects revenue to be between $6.35 billion and $6.45 billion, down from its earlier estimate of up to $6.8 billion. Earnings per share projections were also reduced, with the company now expecting between $2.30 and $2.45 per share, lower than the prior range of $2.70 to $3.15.
The revised outlook reflects the tougher conditions in both North America and international markets. The company is facing pricing pressure, weaker sales volumes, and rising costs, all of which make growth harder in the near term. Even with these hurdles, it remains focused on managing expenses and finding ways to regain momentum in the market.
Financial Health and Stability
LW’s financial situation presents a mixed picture.
✅ Operating cash flow remains positive at $772.3 million, which is a good sign.
❌ Levered free cash flow, however, is negative, suggesting financial strain.
❌ The debt-to-equity ratio of 251.72% is concerning and could limit financial flexibility.
✅ The current ratio of 1.35 shows the company has enough liquidity for short-term obligations.
From a profitability standpoint, LW is still making money, with a net income of $367 million over the last twelve months. However, quarterly revenue has declined by 7.6% year-over-year, signaling some challenges in sustaining sales growth.
Another issue is the company’s relatively thin profit margin of 5.8%. This means that after accounting for expenses, only a small portion of revenue translates into actual profit. If costs rise or sales weaken further, these tight margins could shrink even more, putting additional pressure on earnings and dividends.
Valuation and Stock Performance
Looking at LW’s valuation, there are some signs that the stock may be trading at a discount compared to historical levels.
📉 The trailing price-to-earnings (P/E) ratio sits at 20.66, which isn’t overly expensive, but it’s not a deep value play either.
📉 The forward P/E is 14.41, suggesting that analysts expect earnings to improve in the future.
📉 Price-to-sales is at 1.20, which is lower than in previous years, making the stock look cheaper relative to its revenue.
📉 The price-to-book ratio of 4.58 is still on the higher side, but it’s improved from earlier levels.
One of the biggest red flags is how far the stock has fallen. LW has lost nearly 50% of its value from its 52-week high, which is a major drop. While some of this may be due to market-wide pressures, it also reflects investor concerns about the company’s financial health and future growth prospects.
Interestingly, institutional investors still hold a large portion of the stock, with institutions owning over 103% of shares (due to short interest). However, short interest remains significant, with 10.2 million shares short and 9.32% of the float betting against the stock. This suggests that some traders see further downside risk.
Risks and Considerations
While LW has a strong brand and a long history of dividend payments, there are several risks to consider:
🚨 Revenue has been declining, with a 7.6% year-over-year drop. If this trend continues, earnings and dividend payouts could come under pressure.
🚨 The company carries a high debt load, which could become problematic if interest rates remain elevated or if earnings decline further.
🚨 Margins are thin, and any unexpected cost increases could make profitability even more challenging.
🚨 The stock has been highly volatile, losing nearly half of its value from its highs. This indicates uncertainty about the company’s future performance.
🚨 Short interest is notable, suggesting that some investors are betting against the stock’s recovery in the near term.
Final Thoughts
For dividend investors, LW presents an interesting dilemma. The dividend yield has risen due to the stock’s decline, making it look more attractive on the surface. However, underlying financial concerns—including high debt levels, declining revenue, and negative free cash flow—raise questions about the long-term sustainability of its dividend policy.
While the company still generates positive operating cash flow, it needs to prove that it can stabilize earnings and strengthen its balance sheet before dividend growth can be considered reliable. Investors who prioritize income may find the current yield appealing, but it’s important to keep a close eye on financial trends and company performance going forward.
LW isn’t necessarily a dividend trap, but it’s also not the safest bet for those looking for consistent income without risk. The next few earnings reports will be key in determining whether the company can regain investor confidence and continue rewarding shareholders with stable dividends.
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