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Plenty of traders like the concept that shopping for a penny share might typically imply paying pennies for one thing that seems to be price much more in future.
However penny shares will be probably profitable in different methods too. Some pay substantial dividends. For instance, one I personal yields over 8%. I like that passive revenue and plan to maintain holding the share – however will the payout proceed?
Robust market place
The dividend in query has not but despatched me up the wall, however what goes up partitions is one thing this firm is aware of a good bit about.
As the vendor of 1 in 5 family tiles used throughout the nation, Topps Tiles (LSE: TPT) has a robust place available in the market. After it purchased property from a competitor that entered liquidation this summer season, I believe it might be much more competitively positioned.
Over the long run, I count on demand for tiles to be pretty resilient. New homes are being constructed and outdated ones refurbished.
Nonetheless, that doesn’t imply Topps is resistant to the housing cycle. Certainly, this is among the key dangers I see with this penny share. After reporting a report when it comes to income for its most up-to-date full 12 months, the group introduced this month that its 2024 gross sales revenues are more likely to be round 6% decrease than the earlier 12 months.
The corporate described the buying and selling atmosphere as “very challenging across the whole year”. I believe that might proceed to be the case.
Sustaining the dividend might be difficult
Final 12 months, the corporate’s dividend was not lined by fundamental earnings. On the interim stage this 12 months, the dividend was held flat. Once more it was not lined. Adjusted earnings per share of 1p didn’t cowl the 1.2p payout. And on the fundamental earnings stage, the image was even worse, with a lack of 1.1p per share.
As a part of its interim report, the board outlined a number of contingencies it has thought-about within the occasion of “a severe but plausible trading scenario”. Amongst others, it thought-about suspending the dividend.
For now, I don’t assume the corporate’s buying and selling deserves a “severe” label. I additionally assume the board will probably be eager to keep up the dividend if it presumably can. And adjusted web money of £19m on the finish of the primary half offers it some monetary cushion.
The excessive yield helps assist it, for my part. If the dividend is reduce, not to mention axed altogether, I believe the share worth might tumble.
Why I nonetheless just like the funding case
Nonetheless, the current earnings image has not been encouraging. The buying and selling atmosphere stays troublesome. Except issues enhance markedly, I see an actual danger that the dividend is not going to be sustained at its present stage in coming years.
As a long-term investor although, I proceed to love Topps’ sturdy place in a market which will see uneven however nonetheless ongoing demand. I’ve no plans to promote the penny share.
