Here's Why We're Wary Of Buying TT Electronics' (LON:TTG) For Its Upcoming Dividend

It looks like TT Electronics plc (LON:TTG) is about to go ex-dividend in the next three days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Therefore, if you purchase TT Electronics' shares on or after the 12th of September, you won't be eligible to receive the dividend, when it is paid on the 15th of October.

The company's next dividend payment will be UK£0.0225 per share. Last year, in total, the company distributed UK£0.068 to shareholders. Based on the last year's worth of payments, TT Electronics has a trailing yield of 4.6% on the current stock price of UK£1.47. 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.

See our latest analysis for TT Electronics

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. TT Electronics's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If TT Electronics 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. Dividends consumed 50% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. TT Electronics 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.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. TT Electronics has delivered 2.3% dividend growth per year on average over the past 10 years.

We update our analysis on TT Electronics every 24 hours, so you can always get the latest insights on its financial health, here.

To Sum It Up

Is TT Electronics worth buying for its dividend? It's hard to get used to TT Electronics paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. Bottom line: TT Electronics has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with TT Electronics. To that end, you should learn about the 2 warning signs we've spotted with TT Electronics (including 1 which is potentially serious).

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.