The board of International Personal Finance plc (LON:IPF) has announced that the dividend on 12th of May will be increased to £0.08, which will be 11% higher than last year’s payment of £0.072 which covered the same period. The payment will take the dividend yield to 7.3%, which is in line with the average for the industry.
We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. The last payment was quite easily covered by earnings, but it made up 3,984% of cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.
The next year is set to see EPS grow by 30.2%. If the dividend continues along recent trends, we estimate the payout ratio will be 30%, which is in the range that makes us comfortable with the sustainability of the dividend.
See our latest analysis for International Personal Finance
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was £0.12 in 2015, and the most recent fiscal year payment was £0.114. The dividend has shrunk at a rate of less than 1% a year over this period. Declining dividends isn’t generally what we look for as they can indicate that the company is running into some challenges.
With a relatively unstable dividend, it’s even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. International Personal Finance has seen earnings per share falling at 2.7% per year over the last five years. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would be a touch cautious of relying on this stock primarily for the dividend income.
