How secure is the Greggs (LON:GRG) dividend?

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 mid cap pie supremo Greggs (LON:GRG), which yields 1.80% (set to rise to 2.39%), 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

GET MORE DATA-DRIVEN INSIGHTS INTO LON:GRG »

How to interpret Greggs’s 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 Greggs measures up.

The group’s trailing twelve month (TTM) earnings per share are 74.5p and its TTM dividend per share is 37p. Dividing the former by the latter shows that Greggs has a TTM dividend cover of 2.02.

This is a positive sign for shareholders of Greggs. 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