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Can you count on Convatec's dividend payment?

19th Mar by Michael Green

The Economist wrote in the aftermath of the 2008 financial crash that the crisis had led to the largest number of dividend cuts and suspensions since the Great Depression of the 1930s. Just over a decade later, are we about to see something similar?

Income investors were reminded of the fact that dividend payments are far from certain. This type of risk doesn’t go away. People just forget about it for a while. Then, before you know it, one of your “safe” companies has issued a profit warning and is cutting its dividend.

In the UK, 2018 was a terrific year for dividends but a bad one for share prices. This pushed yields to extraordinary heights. A very high yield is often a sign of trouble ahead, as investors know that company earnings can evaporate when the economy turns down.

One of the quickest ways to kick the tires on your current dividend generators is to check 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. Anything below one and a half times - as is the case for Convatec (LON:CTEC) - should be stirring us to investigate in more detail.


Calculating Convatec’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. It happens all the time. With that in mind, let’s take a look at Convatec’s dividend cover.

We can get all the information we need to see if Convatec has an adequate level of dividend cover from the group’s StockReport. The group’s trailing twelve-month earnings per share is 0.078 and its trailing twelve-month dividend per share is 0.060. 

Divide the former by the latter and we get a trailing twelve-month dividend cover for Convatec of 0.083. 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.

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.

As for Convatec (LON:CTEC), you can find a wealth of financial data on the group's StockReport, including information on the group's past and forecast dividend payments. 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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