There are lots of financial indicators that can help us evaluate the sustainability of a company’s dividend. Knowing when these payments to shareholders are becoming a strain is valuable as it gives us time to decide whether our money might be better off deployed elsewhere.
Taking the best of these and applying them to midstream energy company Hammerson (LON:HMSO), which pays a 16.1% rolling dividend, raises questions about whether it can afford this dividend payment...
Hammerson's (LON:HMSO) heavily geared balance sheet
One way to analyse dividend safety is to focus on 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 gearing (debt to equity) on the balance sheet is generally considered to be 50 percent or less. Hammerson's gearing ratio is 57.4% - 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. Hammerson's current ratio is 0.74 - below the 1.0x threshold.
Is Hammerson's (LON:HMSO) dividend cover below 1.0x?
Dividend cover is seen by many as the essential 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. Hammerson's rolling dividend cover is -2.68.
- The historic dividend cover is, of course, based on historic dividends and earnings. Hammerson's historic dividend cover is -3.63.
Both of these figures are well below the 1.0x safety threshold that we have set and suggests the company is struggling to meet its dividend commitments.
Is the company struggling to generate cash?
Shareholders could take additional steps to analyse dividend safety by comparing Free Cashflows Per Share (FCF PS) with the Dividend Per Share (DPS). Hammerson generated 0.11 in FCF PS. This is lower than the dividend per share of 0.21 and indicates that the company has not generated enough FCF to sustain dividends over the past twelve months.
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 Hammerson (LON:HMSO), 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.