Will Spark Infrastructure (ASX:SKI) have to cut its dividend payment?

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. Going through these measures and applying them to Spark Infrastructure (ASX:SKI), which pays a 0.15 rolling dividend, shows that shareholders ought to be seriously concerned about the sustainability of its dividend...

Evaluating Spark Infrastructure (ASX:SKI)'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 net gearing (net debt to equity) on the balance sheet is generally considered to be 50 percent or less. Spark Infrastructure’s net gearing ratio is 70.0% - 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 1.0x. Spark Infrastructure’s current ratio is 0.28.

Does Spark Infrastructure 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). Spark Infrastructure generated 0.030 in FCF PS. This is lower than the dividend payout 0.15 and indicates that the company has not generated enough FCF to cover dividends over the past twelve months.

A look at Spark Infrastructure (ASX:SKI)’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 Spark Infrastructure, based on projected dividends and earnings, is 0.33.
• The historic dividend cover is based on historic dividends and earnings. Spark Infrastructure’s historic dividend cover is 0.31.

Both of these figures are below the 1.0x safety threshold for Spark Infrastructure that we have set. This suggests that the dividend could be at risk.

Income investing: what you need to know

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