Why It Might Not Make Sense To Buy Travis Perkins plc (LON:TPK) For Its Upcoming Dividend
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Travis Perkins plc (LON:TPK) is about to trade ex-dividend in the next three days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order 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. Meaning, you will need to purchase Travis Perkins' shares before the 1st of October to receive the dividend, which will be paid on the 6th of November.
The company's upcoming dividend is UK£0.04 a share, following on from the last 12 months, when the company distributed a total of UK£0.12 per share to shareholders. Looking at the last 12 months of distributions, Travis Perkins has a trailing yield of approximately 2.0% on its current stock price of UK£5.985. If you buy this business for its dividend, you should have an idea of whether Travis Perkins's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Travis Perkins lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Travis Perkins didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Luckily it paid out just 9.1% of its free cash flow last year.
Check out our latest analysis for Travis Perkins
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Travis Perkins was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Travis Perkins has seen its dividend decline 13% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
Get our latest analysis on Travis Perkins's balance sheet health here.
To Sum It Up
From a dividend perspective, should investors buy or avoid Travis Perkins? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Ever wonder what the future holds for Travis Perkins? See what the 15 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.