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Don't Race Out To Buy TPC Consolidated Limited (ASX:TPC) Just Because It's Going Ex-Dividend

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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see TPC Consolidated Limited (ASX:TPC) is about to trade ex-dividend in the next four days. The ex-dividend date occurs one day 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. Accordingly, TPC Consolidated investors that purchase the stock on or after the 8th of March will not receive the dividend, which will be paid on the 23rd of March.

The company's next dividend payment will be AU$0.03 per share, on the back of last year when the company paid a total of AU$0.20 to shareholders. Calculating the last year's worth of payments shows that TPC Consolidated has a trailing yield of 7.9% on the current share price of A$2.52. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for TPC Consolidated

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. An unusually high payout ratio of 229% of its profit suggests something is happening other than the usual distribution of profits to shareholders. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year, it paid out dividends equivalent to 1,420% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how TPC Consolidated intends to continue funding this dividend, or if it could be forced to cut the payment.

As TPC Consolidated's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see how much of its profit TPC Consolidated paid out over the last 12 months.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see TPC Consolidated's earnings have been skyrocketing, up 27% per annum for the past five years. While earnings per share are growing rapidly, the fact that the company is paying out more than twice its earnings as dividends is quite concerning. We'd suggest looking into this further before considering a purchase.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last five years, TPC Consolidated has lifted its dividend by approximately 27% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

From a dividend perspective, should investors buy or avoid TPC Consolidated? While it's nice to see earnings per share growing, we're curious about how TPC Consolidated intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

So if you're still interested in TPC Consolidated despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, we've found 5 warning signs for TPC Consolidated that we recommend you consider before investing in the business.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.