The Character (LON:CCT) dividend payment: how safe is it?

Investing in equities can be a rocky ride for retail investors, but a solid track record of dividend payments is one way a listed company might look to share price volatility. If a dividend becomes unsustainable and gets cut, however, shareholders can suffer a reduction in income and a knock to the share price.

Take Consumer Cyclicals company Character (LON:CCT), which pays a rolling dividend yield of 4.56%. The Company is engaged in the design, development and international distribution of toys, games and gifts in the UK, EU, and Far East.

For the six months ended 28 February 2019, Character Group plc revenues increased 17% to £58.8m and net income before extraordinary items increased 25% to £4.4m. Given this buoyant performance, is Character's dividend payment a good income opportunity?

Does Character generate enough earnings?

Dividend cover is perhaps the most widely used measure of dividend health. It is computed by dividing a company's earnings per share by its dividend per share (EPS/DPS). Usually, dividend cover of less than 1.5x earnings requires further investigation.

The rolling dividend cover for Character, based on projected dividends and earnings, is 1.78 and its trailing twelve month dividend cover is 1.94. Both of these figures are above the 1.5x safety threshold for Character. This suggests that the dividend could be safe.

Does Character have positive fundamental momentum?

A primary metric used by SocGen to assess dividend safety is an indicator known as the F-Score. Whereas most ratios (e.g. dividend cover) look solely at a company’s current financial state, the F-Score looks at the direction in which its financial state is moving. Companies are likely to have a safer dividend if the financial state is improving. Character’s F-Score is 8. This suggests that the group’s dividend is safe.

Does Character 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 net gearing (net debt to equity) on the balance sheet is generally considered to be 50 percent or less. Evolution Mining’s net gearing ratio is -58.8% - 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. Character’s current ratio is 2.19 - well above the 1x threshold.

Does Character 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). Character generated 84p in FCF PS. This is higher than the dividend per share 25p 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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