These checks show Royal Caribbean Cruises's (NYQ:RCL) dividend could be in trouble

There are lots of financial indicators that can help us evaluate the sustainability of a company’s dividend. Knowing when these payments to shareholders are becoming a strain is valuable, as it gives us time to decide whether our money might be better off deployed elsewhere.

Taking the best of these and applying them to Royal Caribbean Cruises (NYQ:RCL), which pays a rolling dividend of 3.74%, raises questions about whether it can afford this dividend payment...

Royal Caribbean Cruises's (NYQ:RCL) heavily geared balance sheet

One way to analyse dividend safety is to focus 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 gearing (debt to equity) on the balance sheet is generally considered to be 50 percent or less. Royal Caribbean Cruises's gearing ratio is 115.6% - 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. Royal Caribbean Cruises's current ratio is 0.51 - below the 1.0x threshold.

Is Royal Caribbean Cruises's (NYQ:RCL) dividend cover below 1.0x?

Dividend cover is seen by many as the essential dividend health metric and is calculated by dividing earnings per share divided by dividend per share (EPS/DPS). The usual rule of thumb is that a dividend cover of less than 1.5x earnings could become a matter of concern.

• The rolling dividend cover is based on projected dividends and earnings. Royal Caribbean Cruises's rolling dividend cover is 0.037.
• The historic dividend cover is, of course, based on historic dividends and earnings. Royal Caribbean Cruises's historic dividend cover is 0.28.

Both of these figures are well below the 1.0x safety threshold that we have set and suggests the company is struggling to meet its dividend commitments.

Is the company struggling to generate cash?

Shareholders could take additional steps to analyse dividend safety by comparing Free Cashflows Per Share (FCF PS) with the Dividend Per Share (DPS). Royal Caribbean Cruises generated -4.63 in FCF PS. This is lower than the dividend per share of 3.04 and indicates that the company has not generated enough FCF to sustain dividends over the past twelve months.

Income investing: what you need to know

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