EN
Dividend Investors: Don't Be Too Quick To Buy TFF Group (EPA:TFF) For Its Upcoming Dividend
TFF Group (EPA:TFF) is about to trade ex-dividend in the next 3 days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled 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. Accordingly, TFF Group investors that purchase the stock on or after the 4th of November will not receive the dividend, which will be paid on the 6th of November.
The company's upcoming dividend is €0.40 a share, following on from the last 12 months, when the company distributed a total of €0.40 per share to shareholders. Last year's total dividend payments show that TFF Group has a trailing yield of 2.8% on the current share price of €14.12. 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! We need to see whether the dividend is covered by earnings and if it's growing.
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. Last year, TFF Group paid out 98% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. What's good is that dividends were well covered by free cash flow, with the company paying out 18% of its cash flow last year.
It's good to see that while TFF Group's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.
Check out our latest analysis for TFF Group
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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see TFF Group's earnings per share have dropped 15% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. TFF Group has delivered 7.2% dividend growth per year on average over the past 10 years. 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. TFF Group is already paying out 98% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
The Bottom Line
Is TFF Group worth buying for its dividend? It's not a great combination to see a company with earnings in decline and paying out 98% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not that we think TFF Group is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
So if you're still interested in TFF Group despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 4 warning signs for TFF Group that we strongly recommend you have a look at before investing in the company.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.