These signs suggest Renewi's (LON:RWI) dividend payment is at risk

Dividend cuts are typically bad news for shareholders - so anticipating them ahead of time can reduce risk and help improve portfolio performance.

Take Renewi (LON:RWI). The waste-to-product company has been an awful share price performer and with good reason - it hasn't posted any profit in more than five years. 

Today, its 3.4c rolling dividend represents a whopping 14% yield. But can it really afford this dividend payment?

Renewi's (LON:RWI) 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 net gearing (net debt to equity) on the balance sheet is generally considered to be 50 percent or less. Renewi’s net gearing ratio is 129.6% - 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. Renewi's current ratio is 0.63 - below the 1.0x threshold.

Is Renewi's (LON:RWI) 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 dividend cover of less than 1.5x earnings can become a concern.

• The rolling dividend cover is based on projected dividends and earnings. Renewi’s rolling dividend cover is 1.83.
• The historic dividend cover is, of course, based on historic dividends and earnings. Renewis’s historic dividend cover is -1.89.

The historic figure is below the 1.0x safety threshold for Renewi that we have set, although this is forecast to improve. The question is whether these forecasts can be predicted. 

A quick look at Renewi's StockReport shows that five brokers are following the company, although the history of their forecasts signals uncertainty as to future performance:

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). Renewi generated 3.0 in FCF PS. This is lower than the dividend per share of 3.4 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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