While Extinction Rebellion Activists are making sure the entrance to the London Stock Exchange is secure, I thought it might be an apt time to see if the financial exchange's dividend is similarly well protected.
A reputation as a dependable 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. 1.21%, it is useful to check how well these payments are covered by earnings.
Earnings per share divided by dividend per share is called dividend cover - and it’s a great way to quickly gauge the affordability of London Stock Exchange's 1.21% rolling dividend yield.
How to interpret London Stock Exchange’s (LON:LSE) 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 London Stock Exchange measures up.
The group’s FY18 earnings per share were 136p and its FY18 dividend per share was 60p. Dividing the former by the latter shows that London Stock Exchange has a dividend cover of 2.25.
This is a positive sign for shareholders of London Stock Exchange. 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.