Dividend Cover is a popular measure of dividend safety. It is calculated as earnings per share divided by the dividend per share. It provides a quick fix on how many times the dividend is ‘covered’ by earnings. This is a trailing twelve month figure.
This aims to answer the question, how easy it will it be for a company to continue to pay out the current dividend? It does this by working out the ratio of company profits to the amount of dividends paid. For example, if a company had £2m of profits, and paid out £1m in dividends, then the dividend cover ratio would be 2, as £2m / £1m = 2. This means that for every £1 the company pays out, it has another spare to cover the dividend payment. Dividend Cover of less than 1.5 may indicate a danger of a dividend cut while more than 2 is viewed as healthy. The inverse of dividend cover is the Payout Ratio.
As we define the Dividend from the Cashflow statement, that means that it's a negative cash-flow item so the Dividend Cover is negative and so is the Payout Ratio, so it's important to be aware of this when screening.
This is measured on a TTM basis.
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