Can Marston's (LON:MARS) afford its dividend payment?

Can Marston's (LON:MARS) afford its dividend payment?

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Dividend cuts are almost always preceded or succeeded by a painful decline in share price - so understanding how to screen out companies whose dividend payments are at risk can help improve portfolio performance.

There are lots of financial indicators that can help us evaluate the sustainability of a company’s dividend. Taking the best of these and applying them to Marston's (LON:MARS), which is set to pay a 7.65% dividend in FY19, raises questions as to whether the company might be better off deploying that cash elsewhere in the business...

Is Marston's (LON:MARS)’s dividend cover below 1.0x?

Dividend cover is seen by many as the essential dividend health metric and is calculated by dividing earnings per share divided by dividend per share (EPS/DPS). The usual rule of thumb is that dividend cover of less than 1.5x earnings can become a concern.

  • The rolling dividend cover is based on projected dividends and earnings. Marston's rolling dividend cover is 1.95.
  • The historic dividend cover is, of course, based on historic dividends and earnings. Marston's historic dividend cover is 0.94.

The historic dividend cover falls below the 1.0x safety threshold that we have set, although Marston's passes our test on a rolling basis. This suggests that the dividend could be at risk but further research is required as to whether dividend cover is poised to improve.

Does Marston's (LON:MARS) 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 gearing (debt to equity) on the balance sheet is generally considered to be 50 percent or less. Marston's gearing ratio is 144.7% - above the 50% threshold. It is worth noting, though, that a lot of Marston's debt is securitized against its freehold pub estate. This makes the debt less costly and goes some way to justifying a larger debt pile than companies with fewer property assets.

The current ratio (current assets / current liabilities) gauges a company’s capacity to service short term debts. A current ratio of less than one can be cause for concern. Marston's current ratio is 0.70 - below the 0.8x threshold.

Does Marston's 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). Marston's generated 3.1p in FCF PS. This is lower than the dividend payout 7.5p and indicates that the company has not generated enough FCF to cover dividends over the past twelve months.

This is likely due to the fact that running pubs is a very capital-intensive enterprise. Bearing this need for constant reinvestment in mind, the question must be asked: could the cash spent on Marston's 7.5p dividend to shareholders be better used elsewhere in its estate?


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.

If you’d like to discover more about dividend investing, you can read our free ebook: How to Make Money in Dividend Stocks.


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Marston's's StockRank™

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Marston's's StockRank™

With a StockRank of 73, Marston's is more attractive than 73% of the 7,586 stocks we cover in Europe, according to our proprietary ranking system.

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