It Might Not Be A Great Idea To Buy TP ICAP plc (LON:TCAP) For Its Next Dividend
It looks like TP ICAP plc (LON:TCAP) is about to go ex-dividend in the next 4 days. If you purchase the stock on or after the 1st of October, you won't be eligible to receive this dividend, when it is paid on the 6th of November.
TP ICAP's next dividend payment will be UK£0.056 per share, and in the last 12 months, the company paid a total of UK£0.17 per share. Calculating the last year's worth of payments shows that TP ICAP has a trailing yield of 6.2% on the current share price of £2.706. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether TP ICAP can afford its dividend, and if the dividend could grow.
View our latest analysis for TP ICAP
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. TP ICAP distributed an unsustainably high 171% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut.
When the dividend payout ratio is high, as it is in this case, the dividend is usually at greater risk of being cut in the future.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. TP ICAP's earnings per share have fallen at approximately 18% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, three years ago, TP ICAP has lifted its dividend by approximately 15% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. TP ICAP is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
Final Takeaway
From a dividend perspective, should investors buy or avoid TP ICAP? Earnings per share are in decline and TP ICAP is paying out what we feel is an uncomfortably high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. TP ICAP doesn't appear to have a lot going for it, and we're not inclined to take a risk on owning it for the dividend.
Although, if you're still interested in TP ICAP and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 5 warning signs with TP ICAP and understanding them should be part of your investment process.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. 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.
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