Does Inchcape plc (LON:INCH) Have A Place In Your Portfolio?

Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Historically, Inchcape plc (LON:INCH) has been paying a dividend to shareholders. Today it yields 4.9%. Let’s dig deeper into whether Inchcape should have a place in your portfolio.

See our latest analysis for Inchcape

How I analyze a dividend stock

Whenever I am looking at a potential dividend stock investment, I always check these five metrics:

• Does it pay an annual yield higher than 75% of dividend payers?

• Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?

• Has dividend per share risen in the past couple of years?

• Is its earnings sufficient to payout dividend at the current rate?

• Will the company be able to keep paying dividend based on the future earnings growth?

LSE:INCH Historical Dividend Yield November 2nd 18

How does Inchcape fare?

Inchcape has a trailing twelve-month payout ratio of 47%, meaning the dividend is sufficiently covered by earnings. However, going forward, analysts expect INCH’s payout to fall to 42% of its earnings, which leads to a dividend yield of around 4.9%. However, EPS should increase to £0.63, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

When thinking about whether a dividend is sustainable, another factor to consider is the cash flow. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.

Reliablity is an important factor for dividend stocks, particularly for income investors who want a strong track record of payment and a positive outlook for future payout. The reality facing INCH investors is that whilst it has continued to pay shareholders dividend, there has not been any increase in the level of dividends paid in the past decade. Though this may not be a serious red flag, strong dividend stocks should always strive to increase its payout over time.

Relative to peers, Inchcape has a yield of 4.9%, which is high for Retail Distributors stocks but still below the market’s top dividend payers.

Next Steps:

Taking into account the dividend metrics, Inchcape ticks most of the boxes as a strong dividend investment, putting it in my list of top dividend payers. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. I’ve put together three important factors you should further examine:

1. Future Outlook: What are well-informed industry analysts predicting for INCH’s future growth? Take a look at our free research report of analyst consensus for INCH’s outlook.

2. Valuation: What is INCH worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether INCH is currently mispriced by the market.

3. Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.