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Is Dcp Midstream Lp's (NYQ:DCP) dividend payment about to get cut?

22nd May '20 by Ben Hobson

Investors love dividends but when business fortunes fade, these payments to shareholders can end up doing more harm than good. When a company is forgoing profitable investment opportunities just to make its dividend payment, you have to wonder whether or not a cut is around the corner...

This could end up being the case with Dcp Midstream Lp (NYQ:DCP), which pays a 3.12 rolling dividend.

A quick analysis of the company shows that shareholders ought to be seriously concerned about the sustainability of its dividend...


Is Dcp Midstream Lp's (NYQ:DCP) dividend cover below 1.0x?

Dividend cover is an important dividend health metric and is calculated by dividing earnings per share 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. Dcp Midstream Lp's (NYQ:DCP) rolling dividend cover is 0.36
  • The historic dividend cover is, of course, based on historic dividends and earnings. Dcp Midstream Lp's (NYQ:DCP) historic dividend cover is -1.26.

Dcp Midstream Lp's dividend cover fails both of these tests above, suggesting that the dividend could be at risk. 

Does Dcp Midstream Lp (NYQ:DCP) have a strong balance sheet?

Another way of thinking about dividend safety is to instead look at 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. Dcp Midstream Lp's (NYQ:DCP) net gearing ratio is 100.3% - well 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. Dcp Midstream Lp's (NYQ:DCP) current ratio is 0.99 - below our 1.0x cut-off point.

Does Dcp Midstream Lp 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). Dcp Midstream Lp generated 2.56 in FCF PS. This is lower than the dividend payout 3.12 and indicates that the company has not generated enough FCF to sustain dividends over the past twelve months.

Looking at the three simple tests above, It is arguable that Dcp Midstream Lp's (NYQ:DCP) is struggling to finance its dividend payments. Bearing this in mind, questions must be raised about whether the cash given back to shareholders might be better used elsewhere in the business.

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 Dcp Midstream Lp (NYQ:DCP), 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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