Should you buy Howden Joinery (LON:HWDN) stock for its 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 Howden Joinery (LON:HWDN), which pays a rolling dividend yield of 3.30%.

Is Howden Joinery (LON:HWDN)’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. Howden Joinery’s rolling dividend cover is 2.68.
• The historic dividend cover is, of course, based on historic dividends and earnings.

  Howden Joinery’s trailing twelve month dividend cover is 2.68.

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

Does Howden Joinery (LON:HWDN) 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. Howden Joinery’s net gearing ratio is -43.5% - 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. Howden Joinery’s current ratio is 2.65 - above the 1x threshold.

Does Howden Joinery (LON:HWDN) 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. Howden Joinery’s F-Score is 8. This suggests that Howden Joinery’s dividend is safe.

Does Howden Joinery 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). Howden Joinery generated 0.27 in FCF PS. This is higher than the dividend payout 0.13 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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