Is Restaurant Group's (LON:RTN) dividend payment about to get cut?

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 Restaurant (LON:RTN), which pays a 6.4p rolling dividend. The group operates over 500 restaurants and pub restaurants, but its share price has cratered following a tumultuous few years that have seen various new CFOs, the controversial and contentious debt-fuelled acquisition of Wagamama's, and the subsequent departure of (ex)CEO Andy McCue. The share price chart is not pretty:

As if that weren't enough, a quick analysis of the company shows that shareholders ought to be seriously concerned about the sustainability of its dividend...

Is Restaurant's (LON:RTN) dividend cover below 1.0x?

Dividend cover is an important 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. Restaurant's (LON:RTN) rolling dividend cover is 2.58, which is a strong pass.
• The historic dividend cover is, of course, based on historic dividends and earnings. Restaurant's (LON:RTN) historic dividend cover is 0.37.

Restaurant's historic dividend cover fails our test, suggesting that the dividend could be at risk. The group's accounts are complicated by a hefty rights issue - for example, FY18 statutory EPS is 2.4p vs. Adjusted EPS of 14.7p. Much depends on which of these figures is closer to the economic reality of the business. 

Does Restaurant (LON:RTN) have a strong balance sheet?

Restaurant Group's balance sheet has been weakened by the Wagamama acquisition. Added to its considerable operating lease commitments now is an extra £350m of long-term debt.

A safe level of net gearing (net debt to equity) on the balance sheet is generally considered to be 50 percent or less. Restaurant's (LON:RTN) net gearing ratio is now 69.0%.

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. Restaurant's (LON:RTN) current ratio is 0.57 - below our 0.8x cut-off point.

Does Restaurant 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). Restaurant generated 3.4p in FCF PS. This is lower than the dividend payout 6.4p and indicates that the company has not generated enough FCF to sustain dividends over the past twelve months.

It appears as though Restaurant's (LON:RTN) 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.

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