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Here's why Stagecoach (LON:SGC) might cut its dividend payment

8th Mar '19 by Jack Brumby

Dividend cuts are typically bad news for shareholders - so anticipating them ahead of time can reduce risk and 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 Stagecoach (LON:SGC), which pays a 7.7p rolling dividend, raises questions about whether it can afford to pay this dividend...

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Stagecoach (LON:SGC)'s 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 gearing (debt to equity) on the balance sheet is generally considered to be 50 percent or less. Stagecoach’s gearing ratio is 258.2% - 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. Stagecoach’s current ratio is 0.73 - below the 0.8x threshold.

Is Stagecoach (LON:SGC)’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. Stagecoach’s rolling dividend cover is 2.58.
  • The historic dividend cover is, of course, based on historic dividends and earnings. Stagecoach’s historic dividend cover is -0.89.

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

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). Stagecoach generated 2.3 in FCF PS. This is lower than the dividend payout 7.7 and indicates that the company has not generated enough FCF to sustain dividends over the past twelve months.

For the six months ended 27 October 2018, Stagecoach Group plc revenues decreased 31% to £1.23B and net loss totaled £31.7M as it grappled with issues in its UK Rail segment and North America segment. Its recent lack of free cash flow generation, coupled with these operational issues, raises concerns about the sustainability of its current dividend.

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 Stagecoach (LON:SGC), 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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