A strong dividend track record is one of the best ways a company can signal its quality as an investment to the market. Some of the best companies in the world have enviable histories of dividend payments.
When a dividend gets cut, however, shareholders can suffer the double whammy of reduced income and a hit to the share price. That’s why it is so important to check the sustainability of dividend payments. There are some quick calculations that, when combined together, go a long way in proving a company's ability to continue paying its shareholders.
In this article, we will apply these metrics to Hydrogen (LON:HYDG), which pays a rolling dividend yield of 4.92%.
Is Hydrogen (LON:HYDG)’s dividend well covered?
Dividend cover is perhaps the most widely used measure of dividend health and is simply a company’s earnings per share divided by its dividend per share (EPS/DPS). Generally speaking, a dividend cover of less than 1.5x earnings may indicate a danger.
- The rolling dividend cover is based on projected dividends and earnings. Hydrogen’s rolling dividend cover is 4.56.
- The historic dividend cover is, of course, based on historic dividends and earnings.
Hydrogen’s trailing twelve month dividend cover is 4.72.
Both of these figures are above the 1.5x safety threshold for Hydrogen. This suggests that the dividend could be safe.
Does Hydrogen (LON:HYDG) have a healthy balance sheet?
An alternative way to analyse dividend safety is to focus more directly 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 net gearing (net debt to equity) on the balance sheet is generally considered to be 50 percent or less. Hydrogen’s net gearing ratio is 2.92% - below the 50% threshold.
The current ratio (current assets / current liabilities ) assesses a company’s ability to service short term debts. A current ratio of less than one tends to be a worry. Hydrogen’s current ratio is 1.52 - above the 1x threshold.
Does Hydrogen (LON:HYDG) have positive fundamental momentum?
A useful measure used by SocGen to assess dividend safety is an indicator known as the F-Score, which looks more deeply into the direction in which a company's financial state is moving. Companies are likely to have a safer dividend if the financial state is improving. Hydrogen’s F-Score is 8. This suggests that Hydrogen’s dividend is safe.
Does Hydrogen 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). Hydrogen generated 0.099 in FCF PS. This is higher than the dividend payout 0.016 and indicates that the company has generated enough FCF to sustain dividends.
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 Hydrogen (LON:HYDG), 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.