Topps Tiles’s (LON:TPT) dividends – are they safe?

Stable, rising dividend payments are the holy grail for many income investors but when a dividend gets cut, shareholders can suffer the double whammy of reduced income and a hit to the share price.

That’s why it is so important to gauge how sustainable your investment’s dividend payment is. In this article, I’ll take a few of the best dividend safety metrics and apply them to Topps Tiles (LON:TPT), which pays a rolling dividend yield of 9.73%.

Topps Tiles (LON:TPT)’s dividend cover

Dividend cover is perhaps the most widely used measure of dividend health and is simply a company’s earnings per share divided by its dividend per share (EPS/DPS). Generally speaking, dividend cover of less than 1.5x earnings may indicate a danger.

• The rolling dividend cover is based on projected dividends and earnings. Topps Tiles’s rolling dividend cover is 1.54.
• The historic dividend cover is, of course, based on historic dividends and earnings.

  Topps Tiles’s trailing twelve month dividend cover is 1.52.

Both of these figures are above the 1.5x safety threshold for Topps Tiles. This suggests that the dividend could be safe.

Topps Tiles (LON:TPT)’s balance sheet strength

An alternative way to analyse dividend safety is to focus more directly on a company’s balance sheet strength. A highly leveraged company that struggles to meet its short-term liabilities is more likely to cut its dividend than a well-financed one.

A safe level of net gearing (net debt to equity) on the balance sheet is generally considered to be 50 percent or less. Topps Tiles’s net gearing ratio is 36.8% - below the 50% threshold.

The current ratio (current assets / current liabilities ) assesses a company’s ability to service short term debts. A current ratio of less than one tends to be a worry. Topps Tiles’s current ratio is 1.24 - above the 1x threshold.

Topps Tiles (LON:TPT)’s fundamental momentum

A primary metric used by SocGen to assess dividend safety is an indicator known as the F-Score. Whereas most ratios (e.g. dividend cover) look solely at a company’s current financial state, the F-Score looks more deeply into the direction in which it’s financial state is moving. Companies are likely to have a safer dividend if the financial state is improving. Topps Tiles’s F-Score is 8. This suggests that Topps Tiles’s dividend is safe.

Does Topps Tiles have enough cash?

Shareholders could take additional steps to analyse dividend safety by comparing Free Cashflows Per Share (FCF PS) with the Dividend Per Share (DPS). Topps Tiles generated 0.072 in FCF PS. This is higher than the dividend payout 0.034 and indicates that the company has generated enough FCF to sustain dividends.

Reinvesting the income from company dividends can provide significant returns above those provided by capital gains. But you need to ensure that the payout can be sustained, or you could be in for a double-whammy of disappointment.

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