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The board of Trinseo PLC (NYSE:TSE) has announced that it will pay a dividend of $0.32 per share on the 20th of October. This means the annual payment is 6.2% of the current stock price, which is above the average for the industry.
While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Trinseo's stock price has reduced by 49% in the last 3 months, which is not ideal for investors and can explain a sharp increase in the dividend yield.
Check out our latest analysis for Trinseo
Trinseo's Earnings Easily Cover The Distributions
If the payments aren't sustainable, a high yield for a few years won't matter that much. However, prior to this announcement, Trinseo's dividend was comfortably covered by both cash flow and earnings. This means that most of what the business earns is being used to help it grow.
EPS is set to fall by 11.8% over the next 12 months if recent trends continue. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 38%, which is definitely feasible to continue.
Trinseo's Dividend Has Lacked Consistency
It's comforting to see that Trinseo has been paying a dividend for a number of years now, however it has been cut at least once in that time. This suggests that the dividend might not be the most reliable. The dividend has gone from an annual total of $1.20 in 2016 to the most recent total annual payment of $1.28. This implies that the company grew its distributions at a yearly rate of about 1.1% over that duration. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.
The Dividend Has Limited Growth Potential
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. Trinseo's earnings per share has shrunk at 12% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough.
In Summary
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We don't think Trinseo is a great stock to add to your portfolio if income is your focus.