Should you buy Gulf Keystone Petroleum (LON:GKP) stock for its c6% dividend payment?

A strong dividend track record is one of the best ways a company can signal its quality as an investment to the market. Some of the best companies in the world have enviable histories of dividend payments. 

When a dividend gets cut, however, shareholders can suffer the double whammy of reduced income and a hit to the share price. That’s why it is so important to check the sustainability of dividend payments. There are some quick calculations that, when combined together, go a long way in proving a company's ability to continue paying its shareholders.

In this article, we will apply these metrics to Gulf Keystone Petroleum (LON:GKP), which pays a rolling dividend yield of 5.92%. Bear in mind however that, with its exploration and operations based in the Kurdistan region of Iraq, the company comes with significant geopolitical risks.

Is Gulf Keystone Petroleum (LON:GKP)’s dividend well covered?

Dividend cover is perhaps the most widely used measure of dividend health and is simply a company’s earnings per share divided by its dividend per share (EPS/DPS). Generally speaking, dividend cover of less than 1.5x earnings may indicate a danger.

• The rolling dividend cover is based on projected dividends and earnings. Gulf Keystone Petroleum’s rolling dividend cover is 1.75.
• The historic dividend cover is, of course, based on historic dividends and earnings.

  Gulf Keystone Petroleum’s trailing twelve month dividend cover is 4.67.

Both of these figures are above the 1.5x safety threshold for Gulf Keystone Petroleum. This suggests that the dividend could be safe.

Does Gulf Keystone Petroleum (LON:GKP) have a healthy 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 net gearing (net debt to equity) on the balance sheet is generally considered to be 50 percent or less. Gulf Keystone Petroleum’s net gearing ratio is -35.8% - below the 50% threshold.

The current ratio (current assets / current liabilities ) assesses a company’s ability to service short term debts. A current ratio of less than one tends to be a worry. Gulf Keystone Petroleum’s current ratio is 4.41 - comfortably above the 1x threshold.

Does Gulf Keystone Petroleum (LON:GKP) have positive fundamental momentum?

A useful measure used by SocGen to assess dividend safety is an indicator known as the F-Score, which  looks more deeply into the direction in which a company's financial state is moving. Companies are likely to have a safer dividend if the financial state is improving. Gulf Keystone Petroleum’s F-Score is 9. This suggests that Gulf Keystone Petroleum’s dividend is safe.

Does Gulf Keystone Petroleum 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). Gulf Keystone Petroleum generated 58p in FCF PS. This is higher than the dividend payout 7.3p and indicates that the company has generated enough FCF to sustain dividends.

Reinvesting the income from company dividends can provide significant returns above those provided by capital gains. But you need to ensure that the payout can be sustained, or you could be in for a double-whammy of disappointment.

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