Should Gvc Holdings (LON:GVC) cut its dividend payment?

The market hates an unexpected dividend cut, so it makes sense to screen out companies that struggle to make their dividend payments.

In this article, we have compiled some of the most important sustainability metrics in order to shine a light on a company's capacity to make these dividend payments. When we apply them to Gvc Holdings (LON:GVC), which pays a 32p rolling dividend, we see that serious questions are raised as to whether or not it can continue to pay out this amount of cash to shareholders...

Why Gvc Holdings' (LON:GVC) balance sheet looks weak

The strength of a company’s balance sheet strength plays an important role in whether or not it can afford to pay its dividend. A company carrying a lot of debt that struggles to meet its interest payments is much more likely to cut its dividend than a company with no debt at all.

A safe level of gearing (debt to equity) on the balance sheet is generally considered to be 50 percent or less. Gvc Holdings’s gearing ratio is 52.4% - just 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. Gvc Holdings’s current ratio is 0.76 - below the 0.8x threshold.

A quick look at the share price chart shows that others are also concerned by this apparent lack of balance sheet strength:

Does Gvc Holdings have enough cash?

Another important characteristic of a reliable dividend payer is high levels of free cash generation. Gvc Holdings generated 23p in FCF PS. This is lower than the dividend payout 32p and indicates that the company has not generated enough FCF to sustain dividends over the past twelve months.

Is Gvc Holdings (LON:GVC)’s dividend cover below 1.0x?

Dividend cover is arguably the essential dividend health metric (along with its inverse, the dividend payout ratio) 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. Gvc Holdings’s rolling dividend cover is 0.75.
• The historic dividend cover is, of course, based on historic dividends and earnings. Gvc Holdings’s historic dividend cover is -0.38.

Both of these figures are below the 1.0x safety threshold for Gvc Holdings that we have set. This suggests that the dividend could be at risk. 

The sports betting and gaming industry is facing a lot of regulatory pressure right now. The impact of this is evident in GVC's financial results - for the fiscal year ended 31 December 2018, GVC Holdings PLC revenues increased from £789.9M to £2.94B but it also recorded an increase in net loss, from -£20.7M to -£62.5M. Given those conditions, and the analysis above, the jury is out as to whether this gambling operator can continue to pay its dividend.

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.

If you’d like to discover more about dividend investing, you can read our free ebook: How to Make Money in Dividend Stocks.