Is Hammerson’s (LON:HMSO) dividend payment at risk?

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 Hammerson (LON:HMSO), the owner, manager and developer of retail destinations in Europe which pays a 22p trailing twelve month dividend, shows that we ought to be seriously concerned about the sustainability of these payments to shareholders...

Is Hammerson (LON:HMSO)'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 may indicate a danger.

• The rolling dividend cover is based on projected dividends and earnings. Hammerson's rolling dividend cover is -0.98.
• The historic dividend cover is, of course, based on historic dividends and earnings. Hammerson's historic dividend cover is -1.54.

Both of these figures are below the 1.0x safety threshold for Hammerson. This suggests that the dividend could at risk.

Does Hammerson (LON:HMSO) 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 gearing (debt to equity) on the balance sheet is generally considered to be 50 percent or less. Hammerson's gearing ratio is 55.9% - 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. Hammerson's current ratio is 0.71 - below the 0.8x threshold we have set.

Does Hammerson 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). Hammerson generated -4.5 in FCF PS. This is lower than the dividend per share of 22p and indicates that the company has not generated enough FCF to sustain dividends over the past twelve months.

For the fiscal year ended 31 December 2018, Hammerson plc revenues decreased 10% to £223.3M and Net Operating Income (NOI)-UK decrease of 36% to £151.9M as a result of a decrease in demand for the Company's products and services due to unfavorable market conditions. This goes some way to explaining Hammerson's recent share price performance.

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