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Has the thinking on HYP dividend cover changed?

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Jon277
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Has the thinking on HYP dividend cover changed?

#14505

Postby Jon277 » December 12th, 2016, 7:12 pm

Over the last few months I have noticed more and more HYP suggestions where the dividend cover was less than 2. I could swear that we generally used to have this as one of the main measures (I say generally because I know there are some variations between how we run our HYPs ). Of course as the boards have now gone I can't go and confirm this.

Has the thinking changed on dividend cover ? Or is it that there are too few shares with a dividend cover of greater than 2 ?(possibly because the yields in general have risen).


Jon277

tjh290633
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Re: Has the thinking on HYP dividend cover changed?

#14507

Postby tjh290633 » December 12th, 2016, 7:16 pm

My recollection is that cover of 1.5 was about right, but there are exceptions, like REITs which have to distribute ~90% of their Property income.

Cover of 2 rules out a lot of good companies.

TJH

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Re: Has the thinking on HYP dividend cover changed?

#14510

Postby csearle » December 12th, 2016, 7:25 pm

Jon277 wrote:Of course as the boards have now gone I can't go and confirm this.


You could still here if you really want. :)

Regards,
Chris

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Re: Has the thinking on HYP dividend cover changed?

#14514

Postby kempiejon » December 12th, 2016, 7:51 pm

tjh290633 wrote:My recollection is that cover of 1.5 was about right, but there are exceptions, like REITs which have to distribute ~90% of their Property income...


That's my recollection too, utilities another exception.

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Re: Has the thinking on HYP dividend cover changed?

#14525

Postby Jon277 » December 12th, 2016, 8:31 pm

csearle wrote:
Jon277 wrote:Of course as the boards have now gone I can't go and confirm this.


You could still here if you really want. :)

Regards,
Chris


Thanks Chris. tried a load of links but couldn't find it, Iwas sure it was a cover of 2 though

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Re: Has the thinking on HYP dividend cover changed?

#14528

Postby csearle » December 12th, 2016, 8:39 pm

Jon277 wrote:Thanks Chris. tried a load of links but couldn't find it, Iwas sure it was a cover of 2 though


Yes searching is/was always a bit of a theme on TMF. I think that the dividend cover is one of those safety factors that is best left to the individual rather than having an absolute value prescribed. As Terry has mentioned, and I'm sure you're aware of, there are certain sectors in which for certain reasons said cover cannot be as high as 2.

Regards,
Chris

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Re: Has the thinking on HYP dividend cover changed?

#14530

Postby Lootman » December 12th, 2016, 8:47 pm

csearle wrote:I think that the dividend cover is one of those safety factors that is best left to the individual rather than having an absolute value prescribed. As Terry has mentioned, and I'm sure you're aware of, there are certain sectors in which for certain reasons said cover cannot be as high as 2.

I'd go further and say that is true for most fundamental measures such as cover, debt, P/E ratio, P/B ratio and even dividend yield itself. I find they are mostly useful when comparing different shares within the same sector, but much less useful as market-wide indicators. They have value as relative metrics but I'd be wary of taking any such number as an absolute. Too many other variables.

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Re: Has the thinking on HYP dividend cover changed?

#14532

Postby Arborbridge » December 12th, 2016, 8:56 pm

I find they are mostly useful when comparing different shares within the same sector, but much less useful as market-wide indicators.


That is a good feature of Company REFS. The tables use black "moons" to show how any given share compares with a) its sector b) the market. A half moon is "half ok" so to speak. Glance down the table of various ratios or factors and the more "fully black" moons the better.

Shame, I stopped subscribing! Not because I didn't like it, but purely because with a settled HYP, I need little in the way of new share hunting. I don't even know if it is still published, but it was very useful.


Arb.

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Re: Has the thinking on HYP dividend cover changed?

#14560

Postby moorfield » December 12th, 2016, 10:40 pm

the dividend cover was less than 2


Depends - What's the conventional definition of "HYP dividend cover" used on here?

Personally I ignore the Income Statement altogether and read only the Cashflow Statement:
Operating Cashflow (less Capex Cashflows) / Dividends Paid, which normally takes me about 60 seconds to calculate.

On this measure Sage (SGE) is currently my best covered dividend at 2.2x, AstraZeneca (AZN) the worst at 0.5x. REA Holdings (RE.B) is -1.1x but that is a "must pay-below par" cumulative preference share yielding 10%.

M

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Re: Has the thinking on HYP dividend cover changed?

#14567

Postby moorfield » December 12th, 2016, 10:50 pm

Correction:
Operating Cashflow (less Capex Cashflows, Interest and Tax) / Dividends Paid

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Re: Has the thinking on HYP dividend cover changed?

#14591

Postby Arborbridge » December 13th, 2016, 7:34 am

Operating Cashflow (less Capex Cashflows) / Dividends Paid, which normally takes me about 60 seconds to calculate.


Moorfield, This was discussed here recently, and some of us don't find it quite so easy as you make out. Sometimes, it isn't obvious what is maintenance capex and what isn't, and that is often important.
Secondly, there isn't usually an immediate connection between an under par cash flow and a dividend failure. I've known companies with sub-par cash flow which have come right in a year or two, and conversely it's not unknown for cash flow to fail in subsequent years.

Unfortunately, this is where you get thrown back on SI and trusting the management to do their job.

On a different but related topic, VOD has notably poor dividend cover and I raised a question about whether I should dump it forthwith. The concensus was against doing so, indeed VOD came in the top three chcoices in Gengulphus's recent poll. This result surprised me and shows that people do not adhere strictly to either types of cover calculations.

Arb.

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Re: Has the thinking on HYP dividend cover changed?

#14663

Postby Gengulphus » December 13th, 2016, 11:14 am

tjh290633 wrote:My recollection is that cover of 1.5 was about right, ...


My normal criterion years ago was essentially a minimum cover of 1.5 - which meant that it wasn't too far below being right, rather than being about right!

I did sometimes adjust for covers being below 1.5 by working out what the yield would be if the dividend were cut by enough to make the cover 1.5 - i.e. by using MINIMUM(yield, yield*cover/1.5) instead of the straight yield. Not certain whether that was really a good idea, but at least it was better than accepting shares regardless of the dividend cover!

I do still regard dividend cover below 1.5 as a flaw in a share - not a fatal flaw on its own, but it counts against a share and if there are too many such flaws, that is fatal. Counting up such flaws is the basic idea behind the "black marks" that I use when selecting my UHYPnn demonstration HYPs - see below the large table in https://web.archive.org/web/20161213103940/http://boards.fool.co.uk/uhyp15-selection-13299305.aspx?sort=whole#13300170 for how I do that.

tjh290633 wrote:... but there are exceptions, like REITs which have to distribute ~90% of their Property income.


Indeed - and that makes me suspect that the time I'm talking about above is about 10 years ago or more, because I don't remember having any real difficulty with my cover-related yield adjustment for REITs. As REITs were introduced at the start of 2007, that makes me suspect that I'd either stopped using that adjustment or at least was no longer paying all that much attention to it by that time... Note by the way that if anyone does want to go looking for cover-related stuff from that era on the TMF boards, they need to look on High Yield - Share Strategies rather than High Yield - HYP Practical, as it pre-dates the board split.

Gengulphus

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Re: Has the thinking on HYP dividend cover changed?

#14705

Postby feinmann » December 13th, 2016, 1:23 pm

Hi - new boy here, poised to create his first HYP over the next few months. This thread on dividend cover I find interesting. I have done some stats on a random selection of forty HYP candidates, focusing on their cover over the past five years. I calculated the annual mean for all of them, and I notice this figure has fallen quite dramatically over this time period, specifically: 2.1, 2.0, 1.9, 1.6, 1.4 between 2012 and 2016, respectively. To my untrained eye, this suggests that, directly or indirectly, a HYP portfolio might not be as profitable in coming years as it has in the past - or perhaps I took an atypical sample - or perhaps it is a temporary blip. I would be interested to hear your thoughts on this observation. TIA.

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Re: Has the thinking on HYP dividend cover changed?

#14722

Postby Gengulphus » December 13th, 2016, 2:06 pm

feinmann wrote:... I have done some stats on a random selection of forty HYP candidates, focusing on their cover over the past five years.[ ... I would be interested to hear your thoughts on this observation.


Hmm... Which of the following do you mean?

* For each of the last five years, you took a random selection of forty shares that were HYP candidates in that year. and looked at what their dividend covers were in that year.

* For each of the last five years, you took a random selection of forty shares that were HYP candidates in that year. and looked at what their dividend covers are now.

* You took a random selection of forty shares that are HYP candidates [b}now[/b], and looked at what their dividend covers were in each of the last five years.

* Something else?

Also, what criteria did you use for being HYP candidates, and for the first two possibilities above, how did you avoid survivorship bias and hindsight bias when applying them to past years?

Sorry if these seem pedantic questions, but my thoughts on the observation do depend a great deal on exactly what the observation is. For example, if it's the third one, sometimes companies decide to grow their dividends faster than they can grow their earnings, which of course means that their dividend covers drop. The market will probably only price the shares roughly according to the earnings growth, so that means the dividends grow relative to the share price, i.e. the yield goes up. So if that company policy has been applied over the last five years, it could result in the yield being high now and the dividend cover having dropped over the last five years - and so companies that have had that policy over the last five years could help to explain the observation you report if it was an observation of the third type above. But it wouldn't explain observations of the first type, for instance.

Gengulphus
Last edited by tjh290633 on December 13th, 2016, 6:02 pm, edited 1 time in total.
Reason: Missing [ replaced in tag -TJH

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Re: Has the thinking on HYP dividend cover changed?

#14731

Postby Raptor » December 13th, 2016, 2:34 pm

Just finished reading "Keeping your dividend Edge by Todd Wenning". He says:-

A steady earnings cover of at least 1.5 times is a good cutoff for measuring dividend sustainability and growth potential. In most cases you'll want to see at least 2 times"


Strangely enough that is what I have programmed into my spreadsheet. However, as Genglephus said
I do still regard dividend cover below 1.5 as a flaw in a share - not a fatal flaw on its own, but it counts against a share and if there are too many such flaws, that is fatal.
so needs to be taken along with other factors.

Raptor.

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Re: Has the thinking on HYP dividend cover changed?

#14740

Postby moorfield » December 13th, 2016, 3:09 pm

Arborbridge wrote:
Moorfield, This was discussed here recently, and some of us don't find it quite so easy as you make out. Sometimes, it isn't obvious what is maintenance capex and what isn't, and that is often important.


Apologies I wasn't setting out to irritate with that comment - the point intended was (1) I have been brought up to generally not believe what I read on Income Statements and (2) I want to divine what I need to know about dividend cover easily from one place - that Cashflow Statement does it for me. Mine is not a perfect measurement and doen't make sense really until looked over time - my calculation of VODs divdend cover by the way is 1.1, 0.7, 1.2, 1.1, 0.6, 0.1 -0.7 since 2010 - a clear downwards trend. My calculation is based on an excellent Money Week article from 15 November 2013 page 12 and is very easy to follow - I'm happy to summarise it further.

M

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Re: Has the thinking on HYP dividend cover changed?

#14744

Postby Arborbridge » December 13th, 2016, 3:20 pm


Apologies I wasn't setting out to irritate with that comment
- accepted, and I never thought you were trying to irritate.

I'm happy to summarise it further.


I'd be interested to read a summary of your method - I'm all for learning something.

Arb.

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Re: Has the thinking on HYP dividend cover changed?

#14745

Postby Arborbridge » December 13th, 2016, 3:25 pm

A steady earnings cover of at least 1.5 times is a good cutoff for measuring dividend sustainability and growth potential. In most cases you'll want to see at least 2 times"


Raptor - it does beg the question of what he means by "steady" :)

I reckon you might be hard pressed to find a HYP with "at least 2 times" for most of its shares, and even 1.5x might be difficult until freshly picked.

Which also begs further questions about selling and/or not topping up shares with less than the desirable cover - especially when set against the wish to be dorisian.

Arb

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Re: Has the thinking on HYP dividend cover changed?

#14746

Postby Arborbridge » December 13th, 2016, 3:25 pm

until freshly picked
- I meant "unless".

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Re: Has the thinking on HYP dividend cover changed?

#14754

Postby feinmann » December 13th, 2016, 3:48 pm

Who would dare to call you pedantic Gengulphus?

The 40 companies I looked at were: ADN, ASHM, AZN, BBA, BLND, BP., BWY, CLLN, CNA, COB, CPI, DEB, ECM, EMG, GCP, GNK, GSK, HSBA, HSTN, IMB, ISAT, JLIF, MARS, MKS, MTO, OML, PFC, PHNX, PNN, PSON, RDI, RDSB, SBRY, SSE, TALK, TATE, ULVR, UU., VOD, WMH.

I summed the dividend cover for each of the above for 2012, and divided by 40. I then repeated the exercise for the four years that followed to derive the five means displayed in my comment above.

Any comments on the evident decline?


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