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Is Transurban’s (ASX:TCL) dividend payment at risk?

11th Mar '19 by Jack Brumby

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 Transport Infrastructure company Transurban (ASX:TCL), a conservative large cap which pays a 57c rolling dividend, shows that shareholders ought to be seriously concerned about the prospect of a dividend cut...

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Is Transurban (ASX:TCL)’s dividend cover below 1.0x?

Dividend cover is an essential dividend health metric. It is calculated by dividing earnings per share divided by dividend per share (EPS/DPS). Generally speaking, dividend cover of less than 1.5x earnings can be cause for concern.

  • The rolling dividend cover is based on projected dividends and earnings. Transurban’s rolling dividend cover is 0.33.
  • The historic dividend cover is, of course, based on historic dividends and earnings. Transurban’s historic dividend cover is 0.21.

Both of these figures are well below the 1.0x safety threshold for Transurban that we have set, suggesting Transurban is struggling quite hard to finance its dividend payments.

Does Transurban (ASX:TCL) 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. Transurban’s gearing ratio is 161.3% - more than triple 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. Transurban’s current ratio is 0.66 - below the 0.8x threshold.

Does Transurban 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). Transurban generated -19c in FCF PS. This is lower than the dividend payout 57c and indicates that the company has not generated enough FCF to cover dividends over the past twelve months.

For the six months ended 31 December 2018, Transurban Group revenues increased 30% to A$2.11B and net income before extraordinary items decreased 65% to A$129M. Given this recent trading performance and the above analysis, it is easy to see how Transurban might soon cut its dividend - so shareholders that have invested for the group's yield should be cautious.

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 Transurban (ASX:TCL), 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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