Don't Buy Trinseo S.A. (NYSE:TSE) For Its Next Dividend Without Doing These Checks

By
Simply Wall St
Published
October 02, 2020
NYSE:TSE

It looks like Trinseo S.A. (NYSE:TSE) is about to go ex-dividend in the next four days. You can purchase shares before the 7th of October in order to receive the dividend, which the company will pay on the 22nd of October.

Trinseo's next dividend payment will be US$0.40 per share, and in the last 12 months, the company paid a total of US$1.60 per share. Based on the last year's worth of payments, Trinseo stock has a trailing yield of around 6.3% on the current share price of $25.5. If you buy this business for its dividend, you should have an idea of whether Trinseo's dividend is reliable and sustainable. So we need to investigate whether Trinseo can afford its dividend, and if the dividend could grow.

View our latest analysis for Trinseo

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Trinseo reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Trinseo 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. Over the past year it paid out 118% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

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

historic-dividend
NYSE:TSE Historic Dividend October 2nd 2020

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Trinseo reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past four years, Trinseo has increased its dividend at approximately 7.5% a year on average.

Get our latest analysis on Trinseo's balance sheet health here.

Final Takeaway

Is Trinseo worth buying for its dividend? It's hard to get used to Trinseo paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that being said, if you're still considering Trinseo as an investment, you'll find it beneficial to know what risks this stock is facing. To that end, you should learn about the 3 warning signs we've spotted with Trinseo (including 2 which don't sit too well with us).

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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.
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