3 Checks Before Buying Tristel plc (LON:TSTL) For Its Upcoming Dividend

Investing in dividend stocks can be a lucrative strategy, especially in the healthcare sector, which is known for its stability and growth potential. Tristel plc (LON:TSTL) is a UK-based manufacturer of infection prevention and contamination control products, and it has been making waves with its consistent dividend payments. However, before you jump in, there are three crucial checks you should perform to ensure that Tristel is a sound investment for your portfolio.

Check 1: Dividend Yield and Sector Comparison

Tristel's dividend yield of 4.16% is significantly higher than the average yield in the healthcare sector, which stands at 1.581%. This higher yield can be particularly attractive in a low-interest-rate environment where other income-generating assets may offer lower returns. However, it's essential to understand the implications of this higher yield.

A higher dividend yield can indicate that the stock is undervalued or that the company is distributing a larger portion of its earnings as dividends. In Tristel's case, the company has shown consistent earnings growth, which supports its ability to maintain and potentially increase its dividend payout. For example, the dividend per share has increased from 5.24p in the previous payment to 8.28p in the next payment, showing a growth trend.

Check 2: Dividend Cover and Sustainability

Tristel's dividend cover of approximately 2.0 indicates that the company's earnings are twice the amount of its dividend payout. This suggests that the current dividend payout is sustainable, as the company has sufficient earnings to cover its dividends. However, several factors could influence the future sustainability of Tristel's dividend payout.

1. Earnings Growth: Tristel's earnings growth is a critical factor in maintaining its dividend payout. The company has shown consistent earnings growth in recent years, with a 28.76% increase in dividend growth for the year ending June 30, 2024. This growth trend is essential for sustaining the current dividend payout and potentially increasing it in the future.

2. Revenue Growth: Tristel's revenue growth is another important factor. The company reported an 8.1% increase in revenue for the six months ending December 31, 2024, driven by additional product volume and price increases. Continued revenue growth will support earnings growth and, consequently, the dividend payout.

3. Operational Efficiency: Tristel's operational efficiency, as reflected in its administrative expenses, is also crucial. The company's total administrative expenses increased by 11% to GBP14.6 million. Managing these expenses effectively will help maintain profitability and support the dividend payout.

4. Market Conditions: Tristel operates in the healthcare sector, which can be influenced by market conditions and regulatory changes. For example, the company aims to capitalize on growth opportunities in the US market, which could positively impact its revenue and earnings. However, adverse market conditions or regulatory changes could affect its financial performance and dividend sustainability.

5. Dividend Policy: Tristel's dividend policy, including the frequency and amount of dividends, will also influence its sustainability. The company typically pays two dividends per year, with the next ex-dividend date on March 20, 2025. Maintaining a consistent dividend policy will help build investor confidence and support the dividend's sustainability.

Check 3: Geographic Expansion and Its Impact

Tristel's focus on geographic expansion, particularly in markets like Spain, India, and Austria, presents both potential risks and opportunities that could impact the company's dividend policy.

Opportunities:

1. Market Growth: Expanding into new markets can provide significant growth opportunities. For instance, Tristel's CEO, Matt Sassone, highlighted the "significant growth potential" in the core medical device business, using geographic expansion as the primary driver. This expansion could lead to increased revenue and profits, which in turn could support a higher dividend payout.

2. Diversification: Entering new markets can help diversify Tristel's revenue streams, reducing reliance on any single market. This diversification can provide a buffer against economic downturns or regulatory changes in one region, ensuring more stable earnings and dividends.

3. Innovative Product Portfolio: Tristel's innovative product portfolio, including its chlorine dioxide formulation, can be a competitive advantage in new markets. The company's focus on infection prevention and contamination control products is particularly relevant in the healthcare sector, which is a growing market globally.

Risks:

1. Market Uncertainty: Expanding into new markets comes with uncertainties, such as regulatory hurdles, cultural differences, and competition. For example, entering the Indian market might face challenges due to stringent regulatory requirements and intense competition from local players.

2. Currency Fluctuations: Operating in multiple currencies can expose Tristel to exchange rate risks. Fluctuations in the value of currencies in Spain, India, and Austria relative to the British Pound could impact the company's earnings and, consequently, its ability to maintain or increase dividends.

3. Operational Challenges: Establishing a presence in new markets requires significant investment in infrastructure, marketing, and local partnerships. These investments could strain the company's financial resources in the short term, potentially affecting the dividend payout.

4. Economic Conditions: Economic conditions in the target markets can vary significantly. For instance, economic instability in Spain or India could impact Tristel's sales and profitability, leading to a reduction in dividends.

Impact on Dividend Policy:

- Increased Dividends: If the geographic expansion is successful, Tristel could see increased revenue and profits, allowing the company to maintain or even increase its dividend payout. For example, the company's interim dividend for the year ended June 30, 2025, is 5.68 pence per share, up 8.4% from the previous year, indicating a positive trend.

- Stable Dividends: Diversification through geographic expansion can provide a more stable revenue base, helping Tristel maintain a consistent dividend policy even during economic downturns in any single market.

- Potential Reduction: However, if the expansion faces significant challenges or economic conditions in the target markets deteriorate, Tristel might need to reinvest profits into these markets, potentially leading to a reduction in dividends in the short term.

In conclusion, Tristel's focus on geographic expansion presents both opportunities and risks. Successful expansion could lead to increased revenue and profits, supporting a higher dividend payout. However, challenges in new markets and economic uncertainties could impact the company's ability to maintain or increase dividends. Before investing in Tristel for its upcoming dividend, it's crucial to perform these three checks to ensure that the company aligns with your investment goals and risk tolerance.