When the going gets tough, dividends get cut. Given today's volatile market conditions, mature economic cycle, and historically high dividend yields that are often inadequately covered by earnings, it pays to be diligent.
One of the quickest ways to kick the tyres on your current dividend generators is to look at the dividend cover (earnings per share divided by dividend per share). Dividend cover is the inverse of the dividend payout ratio. Dividend cover of two times or above is strong, but anything below one and a half times - as is the case for BAE Systems (LON:BAES) - should be stirring us to investigate in more detail.
What is Bae Systems’s dividend cover ratio?
A low level of dividend cover means that a small decline in earnings could consign your dividend payment to the scrap heap. When that happens, it is usually accompanied by a drop in share price value. With that in mind, let’s take a look at BAE Systems dividend cover.
We can get all the information we need to see if Bae Systems has an adequate level of dividend cover from the group’s StockReport. The group’s FY18 earnings per share were 31p and its FY18 dividend per share was 22p.
Divide the former by the latter and we get a trailing twelve-month dividend cover for Bae Systems of 1.40. This is below the 1.5 times cover limit that marks the point at which we should do some further digging on dividend sustainability and safety.
Disclaimer: These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. The author has no position in the stocks mentioned, unless otherwise stated.