Investors love dividends but when business fortunes fade, these payments to shareholders can end up doing more harm than good. When a company is forgoing profitable investment opportunities just to make its dividend payment, you have to wonder whether or not a cut is around the corner...
This could end up being the case with Arena Events (LON:ARE), which pays a 1.25p rolling dividend. Arena Events Group Plc is a United Kingdom-based international turnkey event design and delivery company. The Company provides managed solutions from concept and design through to the construction and delivery of temporary structures, seating and interiors for a host of sporting, outdoor and leisure events around the world.
A quick analysis of Arena shows that shareholders ought to be seriously concerned about the sustainability of its dividend...
Is Arena Events' (LON:ARE) dividend cover below 1.0x?
Dividend cover is an important dividend health metric and is calculated by dividing earnings per share divided by dividend per share (EPS/DPS). The usual rule of thumb is that dividend cover of less than 1.5x earnings can become a concern.
- The rolling dividend cover is based on projected dividends and earnings. Arena Events's (LON:ARE) rolling dividend cover is 2.30, which is a pass.
- The historic dividend cover is, of course, based on historic dividends and earnings. Arena Events's (LON:ARE) historic dividend cover is -2.14.
Arena Events' historic dividend cover fails our test, suggesting that the dividend could be at risk.
Does Arena Events (LON:ARE) have a strong balance sheet?
Another way of thinking about dividend safety is to instead look at a company’s balance sheet strength. A highly leveraged company that struggles to meet its short-term liabilities is more likely to cut its dividend than a well-financed one.
A safe level of net gearing (net debt to equity) on the balance sheet is generally considered to be 50 percent or less. Arena Events's (LON:ARE) net gearing ratio is 70.3% - well above the 50% threshold.
The current ratio (current assets / current liabilities ) gauges a company’s capacity to service short term debts. A current ratio of less than one can be cause for concern. Arena Events's (LON:ARE) current ratio is 0.98 - just below our 1.0x cut-off point.
Does Arena Events have enough cash?
Shareholders could take additional steps to analyse dividend safety by comparing Free Cashflows Per Share (FCF PS) with the Dividend Per Share (DPS). Arena Events generated -7.7p in FCF PS. This is lower than the dividend payout 1.3p and indicates that the company has not generated enough FCF to sustain dividends over the past twelve months.
Given the above, it appears as though Arena Events (LON:ARE) is struggling to finance its dividend payments. Bearing this in mind, questions must be raised about whether the cash given back to shareholders might be better used elsewhere in the business.
Income investing: what you need to know
For many investors, dividends are a vital part of their long-term strategy. That's why we have created a variety of income-focused stock screens, such as the Best Dividends Screen, to identify promising candidates for income portfolios. Take a look and see if any of the qualifying stocks might be worthy of further research.
As for Arena Events (LON:ARE), you can find a wealth of financial data on the group's StockReport, including information on the group's past and forecast dividend payments. If you’d like to discover more about dividend investing, you can read our free ebook: How to Make Money in Dividend Stocks.