Could Covid force Singapore Airlines (SGX:C6L) to scrap its dividend payment?

Knowing whether a dividend is likely to be cut is a useful skill for investors – not only do such cuts affect the income a portfolio can produce, but it can also affect the share price, as markets do not react well when such cuts are announced. This means anticipating dividend cuts ahead of time can reduce investment risk and help improve portfolio performance.

Rather than guessing what may happen in the current uncertainty generated by the world's response to Covid, 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 Singapore Airlines (SGX:C6L) raises questions about whether it can afford its dividend payments in the short to medium term.

Singapore Airlines's (SGX:C6L) dividend cover is below

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 1x earnings can become a concern.

• The rolling dividend cover is based on projected dividends and earnings. Singapore Airlines’s rolling dividend cover is -1.88.
• The historic dividend cover is, of course, based on historic dividends and earnings. Singapore Airliness’s historic dividend cover is -2.24.

Both of these figures are below the 1.0x safety threshold for Singapore Airlines that we have set. This suggests that the dividend could be at risk.

Singapore Airlines's (SGX:C6L) heavily geared balance sheet

One way to analyse dividend safety is to focus 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. Singapore Airlines’s net gearing ratio is 77.4% - above the 50% threshold.

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. Singapore Airlines's current ratio is 0.44 - below the 1.0x threshold.

Is the company struggling to generate cash?

Shareholders could take additional steps to analyse dividend safety by comparing Free Cashflows Per Share (FCF PS) with the Dividend Per Share (DPS). Singapore Airlines generated -1.46 in FCF PS. This is lower than the dividend per share of 0.056 and indicates that the company has not generated enough FCF to sustain dividends over the past twelve months.

Income investing: what you need to know

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