Investing in equities can be a rocky ride for retail investors, but a solid track record of dividend payments is one way a listed company might look to share price volatility. If a dividend becomes unsustainable and gets cut, however, shareholders can suffer a reduction in income and a knock to the share price.
Take Industrials company Volution (LON:FAN), which pays a rolling dividend yield of 4.12%. The Company is principally engaged in designing, manufacturing and distribution of unitary and systems ventilation products and equipment.
For the past six months ended 31 January 2020, Volution Group PLC revenues increased 3% to £118.8M
Given this performance, how safe is Volution's dividend payment?
Does Volution generate enough earnings?
Dividend cover is perhaps the most widely used measure of dividend health. It is computed by dividing a company's earnings per share by its dividend per share (EPS/DPS). Usually, dividend cover of less than 1.5x earnings requires further investigation.
The rolling dividend cover for Volution, based on projected dividends and earnings, is 2.84 and its trailing twelve month dividend cover is 1.96. Both of these figures are above the 1.5x safety threshold for Volution. This suggests that the dividend could be safe.
Does Volution have positive 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 at the direction in which its financial state is moving. Companies are likely to have a safer dividend if the financial state is improving.
Volution’s F-Score is 8. This suggests that the group’s dividend is safe.
Does Volution have a strong 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. Evolution Mining’s net gearing ratio is 46.2% - 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. Volution’s current ratio is 1.80 - well above the 1x threshold.
Does Volution 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). Volution generated 0.18 in FCF PS. This is higher than the dividend per share 0.050 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 Volution (LON:FAN), 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.