The Sylvania Platinum 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 Basic Materials company Sylvania Platinum (LON:SLP), which pays a rolling dividend yield of 3.42% that is set to almost double in the year ahead. The Company is a producer of platinum group metals (PGMs), including platinum, palladium and rhodium in Australia and South Africa.

For the fiscal year ended 30 June 2019, Sylvania Platinum Ltd revenues increased 12% to $70.5m and net income jumped 66% to $18.2m. Given this encouraging performance, how safe is Sylvania Platinum's rapidly increasing dividend payment?

Does Sylvania Platinum 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 Sylvania Platinum, based on projected dividends and earnings, is 5.17 and its trailing twelve month dividend cover is 6.30. Both of these figures are above the 1.5x safety threshold for Sylvania Platinum. This suggests that the dividend could be safe.

Does Sylvania Platinum 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. Sylvania Platinum’s F-Score is 8. This suggests that the group’s dividend is safe.

Does Sylvania Platinum 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 -16.8% - 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. Sylvania Platinum’s current ratio is 8.56 - well above the 1x threshold.

Does Sylvania Platinum 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). Sylvania Platinum generated 2.5c in FCF PS. This is higher than the dividend per share 1.0c 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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