Should John Menzies (LON:MNZS) 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 John Menzies (LON:MNZS), which pays a 21p rolling dividend (making for a 5.2% yield), 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 John Menzies' (LON:MNZS) 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 net gearing (net debt to equity) on the balance sheet is generally considered to be 50 percent or less. John Menzies’s net gearing ratio is a whopping 470.9% - way 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. John Menzies’s current ratio is 0.93 - below the 1.0x threshold.

Does John Menzies have enough cash?

Another important characteristic of a reliable dividend payer is high levels of free cash generation. John Menzies generated 6.1p in FCF PS. This is lower than the dividend payout 21p and indicates that the company has not generated enough FCF to cover dividends over the past twelve months.

Is John Menzies' (LON:MNZS) 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. John Menzies’s rolling dividend cover is 1.63...
• But John Menzies’s historic dividend cover is just 0.10.

There are enough warning signs in the above numbers to mean that a dividend here is a real risk. At present, the group continues to be loss-making - for the six months ended 30 June 2019, John Menzies revenues increased 4% to £649.9m but this still translated into a net loss before extraordinary items totaled £4.9m.

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.