The ability to calculate the reliability of dividends is absolutely crucial for investors, not only for evaluating the income generated from your portfolio, but also to avoid a share-price collapse from stocks where payouts are slashed.
There are a variety of ways to judge future dividends, and today I am looking at BT Group (LSE: BT-A) (NYSE: BT.US) to see whether the firm looks a safe bet to produce dependable payouts.
Forward dividend cover
Forward dividend cover is one of the most simple ways to evaluate future payouts, as the ratio reveals how many times the projected dividend per share is covered by earnings per share. It can be calculated using the following formula:
Forward earnings per share ÷ forward dividend per share
BT Group is forecast by City analysts to provide a dividend of 10.9p per share in the 12 months ending March 2014, while earnings per share for this year are expected to come in at 25.6p. This produces dividend cover of 2.3 times prospective earnings, ahead of the broadly-considered safety mark of 2 times.
Free cash flow
Free cash flow is essentially how much cash has been generated after all costs and can often differ from reported profits. Theoretically, a company generating shedloads of cash is in a better position to reward stakeholders with plump dividends. The figure can be calculated by the following calculation:
Operating profit + depreciation & amortisation – tax – capital expenditure – working capital increase
BT Group’s free cash flow stood at £3.68bn in the year ending March 2013, up from £3.05bn in the previous 12 months. Operating profit increased to £3.34bn from £3.09bn, while tax costs also dropped to £64m from £400m in 2012. Capex also dropped, to £2.44bn from £2.59bn, and working capital increases were also marginally less severe.
Financial gearing
This ratio is used to gauge the level debt a company carries. Simply put, the higher the amount, the more difficult it may be to generate lucrative dividends for shareholders. It can be calculated using the following calculation:
Short- and long-term debts + pension liabilities – cash & cash equivalents
___________________________________________________________ x 100
Shareholder funds
BT Group’s gearing ratio came in at 82.4% in 2013, up from 81.8% in the previous year. Debt fell to £9.3bn last year from £9.9bn in 2012, although pension liabilities advanced to £5.86bn from £2.45bn. However, a rise in shareholders’ equity — to £17.28bn from £14.69bn — helped to stymie the rise in the gearing readout.
Buybacks and other spare cash
The telecoms giant has said that it expects capital expenditure both this year and next “to be broadly level with 2012/13.” And the company has specifically earmarked further investment in its fibre optic broadband in its ambitious drive to provide coverage to two-thirds of UK households by next year.
Meanwhile, BT Group also remains committed to returning cash to shareholders via share repurchases, and has outlined buybacks in the region of £300m both this year and next.
Ring in fantastic dividend prospects
BT Group currently boasts a dividend yield of 3.2% this year, fractionally lower than the prospective reading of 3.3% for the broader FTSE 100. The company has an excellent track record of raising the full-year dividend in recent years, and I believe that the firm remains on course to provide increasingly-lucrative yields over a longer-term basis.
Indeed, BT Group is looking to grow the dividend between 10% and 15% both this year and next. The firm is investing heavily in its ‘triple services’ suite across the television, broadband and telephone spaces, a strategy that has heralded a very public standoff with British Sky Broadcasting. And with its massive cost-cutting plan also set to continue delivering results well into the future, I believe that the firm is well placed to thrust earnings higher and with it shareholder payouts.
Zone in on other spectacular stocks
If you already hold shares in BT Group, check out this newly updated special report which highlights a host of other FTSE winners identified by ace fund manager Neil Woodford.
Woodford — head of UK Equities at Invesco Perpetual — has more than 30 years’ experience in the industry, and boasts an exceptional track record when it comes to selecting stock market stars.
This exclusive report, compiled by The Motley Fool’s crack team of analysts, is totally free and comes with no further obligation. Click here now to download your copy.
> Royston does not own shares in BT Group or British Sky Broadcasting.
