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Is Ultra Electronics Holdings’s (LON:ULE) dividend payment safe?

Michael Green

Stable, rising dividend payments are the holy grail for many income investors but when a dividend gets cut, shareholders can suffer the double whammy of reduced income and a hit to the share price.

That’s why it is so important to gauge how sustainable your investment’s dividend payment is. In this article, I’ll take a few of the best dividend safety metrics and apply them to Ultra Electronics Holdings (LON:ULE), which pays a rolling dividend yield of 3.19%.

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Ultra Electronics Holdings (LON:ULE)’s dividend cover

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, dividend cover of less than 1.5x earnings may indicate a danger.

  • The rolling dividend cover is based on projected dividends and earnings. Ultra Electronics Holdings’s rolling dividend cover is 2.04.
  • The historic dividend cover is, of course, based on historic dividends and earnings.

    Ultra Electronics Holdings’s trailing twelve month dividend cover is 1.94.

Both of these figures are above the 1.5x safety threshold for Ultra Electronics Holdings. This suggests that the dividend could be safe.

Ultra Electronics Holdings (LON:ULE)’s balance sheet strength

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. Ultra Electronics Holdings’s net gearing ratio is 36.0% - 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. Ultra Electronics Holdings’s current ratio is 1.81 - above the 1x threshold.

Ultra Electronics Holdings (LON:ULE)’s fundamental momentum

A primary metric used by SocGen to assess dividend safety is an indicator known as the F-Score. Whereas most ratios (e.g. dividend cover) look solely at a company’s current financial state, the F-Score looks more deeply into the direction in which it’s financial state is moving. Companies are likely to have a safer dividend if the financial state is improving. Ultra Electronics Holdings’s F-Score is 8. This suggests that Ultra Electronics Holdings’s dividend is safe.

Does Ultra Electronics Holdings 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). Ultra Electronics Holdings generated 1.00 in FCF PS. This is higher than the dividend payout 0.54 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 Ultra Electronics Holdings (LON:ULE), 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.