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Warning! I think this FTSE 100 dividend stock could make you poorer in 2020

Rupert Hargreaves
Road sign warning of a risk ahead

At first glance, shares in international travel group TUI (LSE: TUI) look like an attractive income investment. 

Based on current City projections, the stock is set to yield 4.9% in 2019 and analysts have pencilled in a 22% increase in the distribution for 2020, which implies a dividend yield of 6% for next year.

Analysts are also expecting the company to report a near 40% increase in earnings per share for 2020, although this will only offset the 36% decline projected for 2019.

If current forecasts are to be believed, TUI will earn €1.17 per share in 2020, compared to €1.57 for 2017. 

These forecasts show that while the travel company might look like a great income investment at first, the underlying business is struggling. And this is the primary reason why I think the stock could make you poorer in 2020. 

Rising debts

Travel and tourism is a highly cyclical and seasonal business. As shareholders in Thomas Cook unfortunately found out earlier this year, for highly indebted firms in the sector, it only takes one bad season to be tipped over the edge. 

TUI’s balance sheet is stronger than Thomas Cook’s was, but not by much. At the end of June 2019, the company had total debts of €2.6bn and net borrowings of €1bn, giving a net-debt-to-equity ratio of 38%. 

Thanks to strong summer sales, its cash balance was at a seasonal high in June. At the end of March, the company’s net borrowing was €2bn, and net gearing was 77%, double the seasonal high watermark. 

While TUI thinks it will benefit from Thomas Cook’s collapse, considering the company’s volatile balance sheet and earnings, I think it might be best for investors to stay away from this opportunity. 

Earnings stability

Instead, I would buy shares in ITV (LSE: ITV).

As an income investment, ITV has many benefits over TUI. For a start, the stock currently offers a higher dividend yield. It is 5.6% at the time of writing, compared to TUI’s 4.9%.

At the same time, ITV’s earnings are much more predictable. Analysts believe the company will report a net profit of £520m this year, compared to £466m for 2018. In my opinion, this predictability makes the dividend much more secure, as management can plan more effectively.

For example, ITV’s management has a rough idea of how much cash the group will generate in 2019 and can, therefore, set the dividend at an appropriate level. The company also has a track record of distributing any additional cash as special dividends.

On top of this dividend sustainability, shares in ITV also appear to be undervalued. Over the past five years, shares in the broadcaster have changed hands at an average forward earnings multiple around 12. 

At the time of writing, the stock is dealing at a forward P/E of just 10.9, which seems to suggest that this investment offers the potential for both capital growth and income over the long term.

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Rupert Hargreaves owns shares in ITV. The Motley Fool UK has recommended ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019