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Lots 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 might be doubtlessly profitable in different methods too. Some pay substantial dividends. For instance, one I personal yields over 8%. I like that passive earnings and plan to maintain holding the share – however will the payout proceed?
Sturdy 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 powerful place available in the market. After it purchased property from a competitor that entered liquidation this summer time, I feel it might be much more competitively positioned.
Over the long run, I anticipate demand for tiles to be pretty resilient. New homes are being constructed and previous ones refurbished.
Nonetheless, that doesn’t imply Topps is proof against the housing cycle. Certainly, this is without doubt one of the key dangers I see with this penny share. After reporting a file by way of income for its most up-to-date full yr, the group introduced this month that its 2024 gross sales revenues are more likely to be round 6% decrease than the earlier yr.
The corporate described the buying and selling surroundings as “very challenging across the whole year”. I feel that might proceed to be the case.
Sustaining the dividend might be difficult
Final yr, the corporate’s dividend was not lined by primary earnings. On the interim stage this yr, 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 primary earnings degree, 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 of within the occasion of “a severe but plausible trading scenario”. Amongst others, it thought of suspending the dividend.
For now, I don’t suppose the corporate’s buying and selling deserves a “severe” label. I additionally suppose the board will likely be eager to keep up the dividend if it probably can. And adjusted internet money of £19m on the finish of the primary half offers it some monetary cushion.
The excessive yield helps assist it, in my opinion. If the dividend is reduce, not to mention axed altogether, I feel the share worth might tumble.
Why I nonetheless just like the funding case
Nonetheless, the latest earnings image has not been encouraging. The buying and selling surroundings stays tough. Until issues enhance markedly, I see an actual threat that the dividend is not going to be sustained at its present degree in coming years.
As a long-term investor although, I proceed to love Topps’ robust place in a market which will see uneven however nonetheless ongoing demand. I’ve no plans to promote the penny share.
