Companies that can barely make their dividend payments are rarely doing anyone a favour. Making these payments to shareholders can distract management and prevent cash going into high-return investments.
In this article, we have compiled some of the most important sustainability metrics in order to shine a light on a company's capacity to make these dividend payments. When we apply them to Pendragon (LON:PDG), which pays a 3.03%rolling dividend, we see that serious questions are raised as to whether or not it can continue to pay out this amount of cash to shareholders...
Pendragon's (LON:PDG) balance sheet looks fragile
A company carrying a lot of debt that struggles to meet its interest payments is much more likely to cut its dividend than a company with no debt at all. A safe level of net gearing (net debt to equity) on the balance sheet is generally considered to be 50 percent or less. Pendragon's net gearing ratio is 246.4% - 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. Pendragon's current ratio is 0.90 - below the 1.0x threshold.
Does Pendragon have enough cash?
Another important characteristic of a reliable dividend payer is high levels of free cash generation. Pendragon actually has negative free cash flow of -3.81p in FCF PS on a trailing twelve-month basis. This is lower than the dividend payout of 0.7p and indicates that the company has not generated enough FCF to cover dividends over the past twelve months.
Is Pendragon's dividend cover below 1.0x?
Dividend cover is arguably the essential dividend health metric (along with its inverse, the dividend payout ratio) 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. Pendragon's rolling dividend cover is -1.48.
- The historic dividend cover is based on historic dividends and earnings. Pendragon's historic dividend cover is -21.1.
Both of these figures are below the 1.0x safety threshold for Pendragon that we have set. This suggests that the dividend could be at risk.
When we take into account the fact that for the ix months ended 30 June 2019, Pendragon PLC revenues decreased 1% to £2.22bn and net loss before extraordinary items plummeted to £131.1m, the possibility of a dividend cut looks even more likely.
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 Pendragon (LON:PDG), 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.