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 Consumer Cyclicals company Norcros (LON:NXR), which pays a rolling dividend yield of 3.91%. The company's principal activities include the development, manufacture and marketing of home consumer products in the UK and South Africa.
For the fiscal year ended 31 March 2019, Norcros plc revenues increased 10% to £331m and net income increased 96% to £19.4m. On top of that, the company paid out almost 4% of its current share price in dividends. I'd like to take a look at how sustainable this dividend payment is, and whether it might increase in future.
Does Norcros 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 Norcros, based on projected dividends and earnings, is 3.43 and its trailing twelve month dividend cover is 2.85. Both of these figures are above the 1.5x safety threshold for Norcros. This suggests that the dividend could be safe.
Does Norcros 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 finances, 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. Norcros’ F-Score is 8. This suggests that the group’s dividend is safe.
Does Norcros 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 27.8% - 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. Norcros’ current ratio is 1.99 - well above the 1x threshold.
Does Norcros 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). Norcros generated 30p in FCF PS. This is higher than the dividend per share 8.4p and indicates that the company has generated enough FCF to sustain dividends.
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.