Don’t chase a high dividend yield, but go for a lower yield well covered by earnings. This is oft-touted advice for investors looking for a ‘safe’ dividend.
However, there’s more to safety than good dividend cover. And Goals Soccer Centres (LSE: GOAL), which announced half-year results this morning, is a case in point.
Safe as houses
Goals joined the stock market in 2004 to roll out its five-a-side football centres. The majority of earnings would be retained to help fund the rollout, but the company proposed to pay “a small dividend each year for the foreseeable future.”
Such dividends were duly paid and even maintained through the financial crisis. For 2014, the payout advanced to 2p, covered a safe-as-houses 7.25 times by underlying earnings. However, for 2015 the board announced there would be no final dividend and that payouts would only recommence “when appropriate.”
What went wrong?
Debt and high operational gearing did for Goals’ dividend. A 4.9% fall in revenue for 2015 translated into a whopping 20.3% drop in EBITDA, and the company’s three times net debt/EBITDA covenant with its lenders was breached. The dividend had to go.
It emerged that there’d been chronic under-investment in Goals’ older sites, and the company announced boardroom changes and a placing to raise £16.75m for catch-up modernisation and to reduce the level of debt.
At the time of the placing Goals said it intends to “return to paying dividends in 2017 when the balance sheet recovers.” However, in today’s results, “2017” has been dropped in favour of “when the Directors believe it is appropriate to do so.”
Arguably, Goals should never have been paying dividends when its expansion was being part-funded by a high level of debt and when older sites were in dire need of modernisation. Management is looking ahead to a future of international expansion, and I reckon retaining earnings may be more sensible than paying dividends at this stage of the company’s development.
Cause for concern?
BT Group (LSE: BT-A) paid a dividend of 14p for its financial year ended 31 March, covered 2.4 times by underlying earnings, which is comfortably above the blue chip ‘safety’ benchmark of two. The yield at the current share price is an attractive 3.7%.
However, debt has led to dividend disappointments in the past for BT shareholders. Back in 2001, the payout was halted with net debt at a whopping £27.9bn. Dividends subsequently resumed at a lower level, and increased until 2009 when the payout was slashed with net debt at £10.4bn and the pension deficit at £4bn. Again, dividends have since grown — although they’re still lower than 10 years ago.
Furthermore, the current balance sheet isn’t exactly healthy, because net debt stands at £9.6bn and the pension deficit at £7.6bn. BT’s business is in better shape today than it was back in 2009 — and the board has shown its confidence by saying it intends to lift the dividend by 10% a year for the next two years — but the balance sheet gives some cause for concern.
BT is already committed to making pension deficit payments totalling £5.25bn between now and 2030, but with the deficit having risen to £7.6bn there could be pressure on the board to send more cash the pensioners’ way and less to shareholders. I don’t see a dividend cut around the corner, but dividend growth could be much less bubbly than investors may be hoping for.
According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…
And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...
It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…
But you need to get in before the crowd catches onto this ‘sleeping giant’.
G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.