Dividend cover
Profit attributable to ordinary shareholders (earnings) ÷ Dividends.
Dividend cover measures the safety or sustainability of the future dividend flow, from the perspective of the investor.
The greater the cover ratio, the greater the assumed likelihood that the firm paying the dividend will continue to be able to pay it in the future.
In the situation where the cover ratio falls below 1.0, the dividend is said to be uncovered and it will not be sustainable at its previous level unless there is a recovery in the firm's profits.
Also known as the dividend cover ratio.
Example 1
GeeCo's profits attributable to ordinary shareholders (earnings) are £600m.
Its dividends for the same period are £200m.
The dividend cover is:
600 / 200
= 3 times
Alternative calculation
Dividend cover can also be calculated on a per-share basis, producing exactly the same result, as:
Dividend cover = EPS / DPS
Where:
EPS = earnings per share
DPS = dividends per share
Example 2
GeeCo's earnings per share were 12p.
Its dividends per share for the same period were 4p.
The dividend cover was:
12 / 4
= 3 times
