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Will Andeavor Logistics Lp’s (NYQ:ANDX) have to cut its dividend payment?

12th Mar '19 by Jack Brumby

Dividend yields are often credited with providing a floor under a share price and reducing its volatility - but when those dividends get cut, the implications for shareholders are painful.

Thankfully there are some warning signs that point to an upcoming dividend cut and allow us as investors to get out ahead of time. Take Andeavor Logistics Lp (NYQ:ANDX), for example, which pays a $4.08 rolling dividend.

Andeavor Logistics LP, formerly Tesoro Logistics LP, is a full-service logistics company operating in the western and mid-continent regions of the United States. For the fiscal year ended 31 December 2018, Andeavor Logistics LP revenues decreased 27% to $2.38B, although Net income applicable to common stockholders increased from $267M to $584M. 

More than doubling net income sounds good but when we go through some basic dividend safety checks, we encounter a lot of red flags at Andeavor. The fact that its shares currently trade on a forecast yield of 11.4% shows we are not the only ones that might be anticipating a reduction in dividend payment, especially given its recent share price performance:

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Evaluating Andeavor Logistics Lp (NYQ:ANDX)'s balance sheet strength

A leveraged company with high levels of debt to equity 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. Andeavor Logistics Lp’s gearing ratio is 106%, which is well above the 50% threshold.

The current ratio (current assets / current liabilities ) is another balance sheet ratio that focuses more on a company’s capacity to service short term debts. A current ratio of less than one can be cause for concern, but here we set the limit at less than 0.8x. Andeavor Logistics Lp’s current ratio is 0.52 - a concerning lack of liquidity.

Does Andeavor Logistics Lp generate enough cash?

A dividend-paying stock is often regarded as having a certain level of quality because it is assumed to generate adequate cash from operations to pay said dividend. This is not always the case though - companies that feel compelled to pay a dividend they can no longer afford often increase net debt and use cash sub-optimally just to avoid a dividend cut.

Shareholders can check if this might be the case by comparing Free Cashflows Per Share (FCF PS) with the Dividend Per Share (DPS). Andeavor Logistics Lp generated $1.21 in FCF PS. This is lower than the dividend per share of $4.08 and indicates that the company has not generated enough FCF to cover dividends over the past twelve months.

A look at Andeavor Logistics Lp (NYQ:ANDX)’s dividend cover

Dividend cover is perhaps the most widely interpreted dividend health metric. It is computed by dividing earnings per share divided by dividend per share (EPS/DPS) and, generally speaking, dividend cover of less than 1.5x earnings should be a flag for further investigation.

  • The rolling dividend cover for Andeavor Logistics Lp, based on projected dividends and earnings, is 0.65.
  • The historic dividend cover is based on historic dividends and earnings. Andeavor Logistics Lp’s historic dividend cover is 0.63.

Both of these figures are below the 1.0x safety threshold for Andeavor Logistics Lp that we have set. This suggests that the dividend could be at risk. Taking all of the above into consideration, it seems clear that Andeavor's dividend is at risk. Income investors might well be better off looking at other candidates.

Income investing: what you need to know

For many investors, dividends are a vital part of their long-term strategy. That's why we have created a variety of income-focused stock screens, such as the Best Dividends Screen, to identify promising candidates for income portfolios. Take a look and see if any of the qualifying stocks might be worthy of further research.

As for Andeavor Logistics Lp (NYQ:ANDX), you can find a wealth of financial data on the group's StockReport, including information on the group's past and forecast dividend payments. If you’d like to discover more about dividend investing, you can read our free ebook: How to Make Money in Dividend Stocks.

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