Is Persimmon's (LON:PSN) 10.9% dividend payment really sustainable?

Persimmon (LON:PSN) has been in the news recently for making the most of the government's Help To Buy scheme. Rather than helping first-timers to buy, you might say the housebuilder has been more focused on helping itself to record profits and paying out generous dividends to shareholders, while its directors and staff enjoy truly astonishing paydays.

The group pays a rolling dividend yield of some 10.9%, but how safe is this payment to shareholders? Perhaps the market is expressing its doubts as to the sustainability of this dividend, as it is essentially subsidised by a government programme that was intended for other means and which could, at some point, be pulled.

One quick test we can do is to look at Persimmon's dividend cover (earnings per share divided by dividend per share). Dividend cover is the inverse of the dividend payout ratio. Dividend cover of two times or above is strong. Anything below one and a half times - as is the case for this york-based housebuilder - should be prompting us to investigate in more detail.

Calculating Persimmon’s dividend cover ratio 

A low level of dividend cover means that a small decline in earnings could consign your dividend payment to the scrap heap. It happens all the time. With that in mind, let’s take a look at Persimmon’s dividend cover.

We can get all the information we need to see if Persimmon has an adequate level of dividend cover from the group’s StockReport. The group’s trailing twelve-month earnings per share is 2.83 and its trailing twelve-month dividend per share is 2.35. 

Divide the former by the latter and we get a trailing twelve-month dividend cover for Persimmon of 1.19. This is below the 1.5 times cover limit that marks the point at which we should do some further digging on dividend sustainability and safety.

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