IPF Boosts Dividend: Is It a Safe Bet for Income Investors?

In the ever-changing landscape of financial markets, finding reliable income sources can be a daunting task. However, International Personal Finance plc (LON:IPF) has recently announced an 11% increase in its dividend to £0.08, which has caught the attention of income-focused investors. This move brings the dividend yield to 7.3%, making it an attractive option for those seeking steady returns. But is this dividend increase sustainable, and what factors should investors consider before jumping in?

Understanding the Dividend Increase

The 11% increase in IPF's dividend is significant, especially when compared to the industry average dividend yield of 1.381%. This boost brings IPF's yield to 7.3%, which is more than five times the industry average. Historically, IPF has seen a dividend growth rate of less than 1% a year over the past decade, with the annual payment declining slightly. However, the company's earnings per share (EPS) are expected to grow by 30.2% in the next year, which could support the sustainability of the dividend.

Sustainability of the Dividend

The sustainability of a dividend is crucial for income investors. IPF's dividend yield of 7.3% and payout ratio of 42% suggest that the dividend is currently well-covered by earnings. The company has a progressive dividend policy with a minimum target payout ratio of 40% of earnings, indicating a commitment to maintaining and potentially increasing dividend payments. However, there are several factors to consider:

1. Earnings Growth: While EPS is expected to grow by 30.2% in the next year, the company's earnings have been declining at a rate of 2.7% per year over the last five years. This trend could impact the sustainability of the dividend if it continues.

2. Cash Payout Ratio: IPF's cash payout ratio is currently very high, at 3,984% of cash flows. This high ratio might expose the dividend to being cut if the business runs into challenges.

3. Dividend History: IPF has a history of at least one dividend cut in the last 10 years, which is a red flag for income investors.

Potential Risks

Investors should be aware of the potential risks associated with IPF's dividend. The high cash payout ratio and the company's earnings history are significant concerns. Additionally, the company's focus on returning cash to shareholders rather than growing the business could be a double-edged sword. While it benefits shareholders in the short term, it could limit the company's ability to invest in growth opportunities.



Conclusion

International Personal Finance plc's 11% dividend increase to £0.08 is an attractive proposition for income investors. However, the sustainability of the dividend is a concern, given the company's earnings history and high cash payout ratio. Investors should closely monitor IPF's earnings and cash flow trends to assess the long-term viability of the dividend. While the current yield is tempting, it's essential to do your due diligence and consider the potential risks before making an investment decision.

In the world of dividend investing, it's crucial to balance the allure of high yields with the need for sustainability. IPF's recent dividend increase is a positive sign, but it's just one piece of the puzzle. As always, do your own research and consider seeking professional advice before making any investment decisions.