Is Bega Cheese Limited (ASX:BGA) At Risk Of Cutting Its Dividend?
Could Bega Cheese Limited (ASX:BGA) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on your dividends, it’s important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you’ll find our analysis useful.
Investors might not know much about Bega Cheese’s dividend prospects, even though it has been paying dividends for the last eight years and offers a 2.1% yield. A 2.1% yield is not inspiring, but the longer payment history has some appeal. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
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ASX:BGA Historical Dividend Yield April 21st 2020
Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 146% of Bega Cheese’s profits were paid out as dividends in the last 12 months. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Bega Cheese’s cash payout ratio last year was 9.4%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Bega Cheese fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we’d be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Is Bega Cheese’s Balance Sheet Risky?
As Bega Cheese’s dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA is a measure of a company’s total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. Bega Cheese is carrying net debt of 3.44 times its EBITDA, which is getting towards the upper limit of our comfort range on a dividend stock that the investor hopes will endure a wide range of economic circumstances.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. With EBIT of 4.35 times its interest expense, Bega Cheese’s interest cover is starting to look a bit thin.
Remember, you can always get a snapshot of Bega Cheese’s latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. Looking at the last decade of data, we can see that Bega Cheese paid its first dividend at least eight years ago. The company has been paying a stable dividend for a while now, which is great. However we’d prefer to see consistency for a few more years before giving it our full seal of approval. During the past eight-year period, the first annual payment was AU$0.06 in 2012, compared to AU$0.10 last year. Dividends per share have grown at approximately 6.6% per year over this time.
Bega Cheese has been growing its dividend at a decent rate, and the payments have been stable despite the short payment history. This is a positive start.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. Bega Cheese’s earnings per share have shrunk at 30% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Bega Cheese’s earnings per share, which support the dividend, have been anything but stable.
Conclusion
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We’re not keen on the fact that Bega Cheese paid out such a high percentage of its income, although its cashflow is in better shape. Second, earnings per share have been in decline, and the dividend history is shorter than we’d like. In summary, Bega Cheese has a number of shortcomings that we’d find it hard to get past. Things could change, but we think there are a number of better ideas out there.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we’ve identified 4 warning signs for Bega Cheese that investors need to be conscious of moving forward.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
If you spot an error that warrants correction, please contact the editor at [email protected]. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
