Is Dunelm’s (LON:DNLM) dividend payment safe?

Many of us know from personal experience that when a dividend gets cut, the share price also tends to head in the same direction.

Screening out companies whose dividend payment is at risk is a must for those looking to limit their downside exposure. A quick check of some basic metrics can go a long way in reducing this risk. In this article, I’ll apply a few of them to home furnishing retailer Dunelm (LON:DNLM), which pays a rolling dividend yield of 3.14%.

Dunelm (LON:DNLM)’s dividend cover

Dividing a company’s earnings per share by its dividend per share (EPS/DPS) is one of the most commonly-used dividend tests. This is called dividend cover. Generally speaking, dividend cover of less than 1.5x earnings may indicate a danger.

• The rolling dividend cover is based on projected dividends and earnings. Dunelm’s rolling dividend cover is 1.62.
• The historic dividend cover is, of course, based on historic dividends and earnings.

  Dunelm’s trailing twelve month dividend cover is 1.54.

Both of these figures are above the 1.5x safety threshold for Dunelm (just about).

Dunelm (LON:DNLM)’s Piotroski F-Score

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 more deeply into the direction in which it’s financial state is moving. Companies are likely to have a safer dividend if the financial state is improving. Dunelm’s F-Score is 8, which is a convincing pass.

Dunelm's cash generation

Shareholders could take additional steps to analyse dividend safety by comparing Free Cashflows Per Share (FCF PS) with the Dividend Per Share (DPS). Dunelm generated 57p in FCF PS. This is higher than the dividend payout 27p and indicates that the company has generated enough FCF to sustain dividends.

Dunelm (LON:DNLM)’s balance sheet

A safe level of gearing (debt to equity) on the balance sheet is generally considered to be 50 percent or less. Dunelm’s gearing ratio is 47.1% - below the 50% threshold. Gearing does not take into account capitalised operating lease commitments, however, which in practice function almost identically to debt. If we were to adjust for this, gearing would probably be over our threshold amount.

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. Dunelm’s current ratio is 1.47 - above the 1x threshold.

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.

Powered by years of research and huge volumes of data analysis which are normally not available to private investors, we have developed the tools that will give you a better chance of picking income boosting stocks.

What are you waiting for. Click here to sign up to your free trial today.