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Is Ausnet Services’s (ASX:AST) dividend payment at risk?

2nd Apr '19 by Jack Brumby

Dividend cuts are almost always preceded or succeeded by a painful decline in share price - so understanding how to screen out companies whose dividend payments are at risk can 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 Ausnet Services (ASX:AST), which pays a 9.5c rolling dividend, shows that shareholders ought to be seriously concerned about the sustainability of its payments to shareholders...

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Is Ausnet Services (ASX:AST)’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. Ausnet Services’s rolling dividend cover is 0.71.
  • The historic dividend cover is, of course, based on historic dividends and earnings. Ausnet Services’s historic dividend cover is 0.79.

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

Does Ausnet Services (ASX:AST) 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 net gearing (net debt to equity) on the balance sheet is generally considered to be 50 percent or less. Ausnet Services’s net gearing ratio is 205.1% - above the 50% threshold. While profit has remained broadly flat since 2013, net debt has increased by 53%.

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. Ausnet Services’s current ratio is 0.69 - below the 1.0x threshold.

Does Ausnet Services 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). Ausnet Services generated 0.7c in FCF PS. This is much lower than the dividend payout 9.5 and indicates that the company has not generated enough FCF to cover dividends over the past twelve months.

The fact that Ausnet fails all five of these dividend safety checks should of serious concern to shareholders.

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 Ausnet Services (ASX:AST), 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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