Dividend cuts are almost always preceded or succeeded by a painful decline in share price - so understanding how to screen out companies whose dividend payments are at risk can help improve portfolio performance.
There are lots of financial indicators that can help us evaluate the sustainability of a company’s dividend. Taking the best of these and applying them to Nustar Energy Lp (NYQ:NS), which pays a 2.40 rolling dividend, shows that shareholders ought to be seriously concerned about the sustainability of its dividend...
Is Nustar Energy Lp (NYQ:NS)’s 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. Nustar Energy Lp’s rolling dividend cover is 0.38.
- The historic dividend cover is, of course, based on historic dividends and earnings. Nustar Energy Lp’s historic dividend cover is -0.43.
Both of these figures are below the 1.0x safety threshold for Nustar Energy Lp that we have set. This suggests that the dividend could be at risk.
Does Nustar Energy Lp (NYQ:NS) have a strong balance sheet?
Another way to look at 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. Nustar Energy Lp’s net gearing ratio is 161% - 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. Nustar Energy Lp’s current ratio is 0.76 - below the 1.0x threshold.
Does Nustar Energy Lp 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). Nustar Energy Lp generated 1.17 in FCF PS. This is lower than the dividend payout 2.40 and indicates that the company has not generated enough FCF to cover 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 Nustar Energy Lp (NYQ:NS), 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.