Next Group has developed a reputation over the years as a dependable payer of dividends and special dividends. There is some evidence that buying progressive dividend payers with solid balance sheets is a strategy well-rewarded by the market. It certainly seems to have helped Next's share price through what has been a troubling time for most High Street operators.
A reputation as a reliable dividend payer takes years to forge and, once created, is a valuable way for a company to signal its long-term profitability to the market and prospective shareholders. Next has a forecast yield of 2.82% (but also has a history of paying out more in special dividends).
Earnings per share divided by dividend per share is called dividend cover - and it’s a great way to quickly gauge a company’s capacity to continue its dividend payments
How to interpret Next’s (LON:NXT) dividend cover
Generally speaking, a dividend cover of below 1.5 times is cause for concern. Above 1.5 is good, but it is when you are getting above two times cover that you see the sign of a high-quality, sustainable dividend payment. Let’s see how Next measures up.
The group’s FY19 earnings per share are £4.96 and its FY19 dividend per share was £1.65. Dividing the former by the latter shows that Next has a reassuring FY19 dividend cover of 2.63.
This is a positive sign for shareholders of Next. Other checks you can perform to assess dividend safety include:
- Checking the current ratio is above 1.5 times and preferably above 2x
- Making sure dividend per share is covered by free cash flow per share
- Assessing balance sheet health by looking at the group’s gearing ratio
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.