The 2008 financial crash led to the largest number of dividend cuts and suspensions since the Great Depression of the 1930s.
Income investors were reminded of the fact that dividend payments are far from certain. This type of risk doesn’t go away. People just forget about it for a while. Then, before you know it, one of your “safe” companies has issued a profit warning and is cutting its dividend.
One of the quickest ways to kick the tyres on your current dividend generators is to check the dividend cover (earnings per share divided by dividend per share). Dividend cover is the inverse of the dividend payout ratio. Dividend cover of two times or above is strong. Anything below one and a half times - as is the case for Glaxosmithkline (LON:GSK) - should be stirring us to investigate in more detail.
Calculating Glaxosmithkline’s dividend cover ratio
A low level of dividend cover means that a small decline in earnings could consign your dividend payment to the scrap heap. It happens all the time. With that in mind, let’s take a look at Glaxosmithkline’s dividend cover.
We can get all the information we need to see if Glaxosmithkline has an adequate level of dividend cover from the group’s StockReport. The group’s trailing twelve-month earnings per share is 75.5p and its trailing twelve-month dividend per share is 80p.
Divide the former by the latter and we get a trailing twelve-month dividend cover for Glaxosmithkline of 0.94. This is below the 1.5 times cover limit that marks the point at which we should do some further digging on dividend sustainability and safety.
Disclaimer: These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. The author has no position in the stocks mentioned, unless otherwise stated.