Evolution Mining (ASX:EVN): a look at dividend payment sustainability

Investing in mining companies can be a rocky ride for retail investors, but a solid track record of dividend payments is one way such a company might look to put a floor under its share price. If a dividend becomes unsustainable and gets cut, however, shareholders can suffer a reduction in income and a knock to the share price.

Take gold company Evolution Mining (ASX:EVN), which pays a rolling dividend yield of 2.19%. The Company is engaged in operating, identifying and developing gold related mining projects in Australia and New Zealand, where it owns and operates approximately seven gold mines - but mining is unpredictable and its fortunes are tied to commodity prices.

This can be seen in Evolution Mining's most recent half-year financial results, when revenues decreased 3% to A$756.2M and net income decreased 26% to A$91.1M. Given this performance, how safe is Evolution Mining's dividend payment?

Does Evolution Mining (ASX:EVN) 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 Evolution Mining, based on projected dividends and earnings, is 1.83.
• The trailing twelve month dividend cover for Evolution Mining is 1.82.

Both of these figures are above the 1.5x safety threshold for Evolution Mining. This suggests that the dividend could be safe.

Does Evolution Mining (ASX:EVN) 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 financial state, the F-Score looks at the direction in which it’s financial state is moving. Companies are likely to have a safer dividend if the financial state is improving. Evolution Mining’s F-Score is 8. This suggests that Evolution Mining’s dividend is safe.

Does Evolution Mining (ASX:EVN) 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. Evolution Mining’s gearing ratio is 1.45% - 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. Evolution Mining’s current ratio is 2.31 - well above the 1x threshold.

Does Evolution Mining 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). Evolution Mining generated 19c in FCF PS. This is higher than the dividend per share of 7.5c and indicates that the company has generated enough FCF to sustain dividends.

Reinvesting the income from company dividends can provide significant returns above those provided by capital gains. But you need to ensure that the payout can be sustained, or you could be in for a double-whammy of disappointment.

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