Carnival (LON:CCL): why this FTSE 100 dividend payer is worth a closer look

There is some evidence that buying progressive dividend payers with solid balance sheets is a strategy well-rewarded by the market. After all, who doesn’t like a steady stream of predictable cash payments?

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. This is why, when it comes to dividend-paying companies such as large cap Hotels, Motels & Cruise Lines operator Carnival (LON:CCL), which yields 3.73%, 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 a company’s capacity to continue its dividend payments

How to interpret Carnival’s (LON:CCL) 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 Carnival measures up.

The group’s trailing twelve month earnings per share are 4.40 and its trailing twelve month dividend per share is 1.89. Dividing the former by the latter shows that Carnival has a trailing twelve month dividend cover of 2.34.

This is a positive sign for shareholders of Carnival. 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

With a market cap of £26.8bn and sales of £14.5bn, Carnival also has size in its favour. The leisure travel company generates profits across a range of geographical and operating segments, with hotels, tours, and cruises across North America, and Europe, Australia & Asia (EAA).

Income investing: what you need to know

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