Times Covered, commonly known as Dividend Cover, is a financial metric that assesses a company’s ability to sustain its dividend payments. It is calculated by dividing a company’s earnings for equity by the dividends paid to ordinary shareholders. This ratio is crucial for investors who rely on dividend income and seek stability and growth in their investment portfolios.
Historical Context
The concept of Times Covered has been integral to financial analysis since the advent of modern corporate finance. It emerged as a key measure during the early 20th century when the need to assess the stability of dividend-paying companies became paramount for long-term investors.
Types/Categories
- High Dividend Cover: A ratio significantly greater than 1, indicating the company retains substantial profits for reinvestment or reserve-building.
- Low Dividend Cover: A ratio close to or below 1, suggesting that the company pays out most or all of its earnings as dividends, possibly risking future dividend sustainability.
Key Events
- 2008 Financial Crisis: Highlighted the importance of dividend cover as many companies with low dividend covers struggled to maintain payments.
- COVID-19 Pandemic: Saw numerous companies with strong dividend covers sustain their payouts despite economic downturns.
Detailed Explanations
Calculation of Times Covered
Importance and Applicability
- Investor Assurance: A high dividend cover provides confidence to investors regarding the company’s financial health and dividend reliability.
- Future Growth: Indicates potential for future growth in dividends if the company is reinvesting retained earnings effectively.
- Risk Assessment: Helps in assessing the risk of dividend cuts in adverse economic conditions.
Examples
- Company A: With earnings of $10 million and dividends of $2 million, the Times Covered ratio is 5. This indicates robust financial health and capacity for future investments or dividend increases.
- Company B: With earnings of $5 million and dividends of $4.5 million, the Times Covered ratio is 1.11, implying potential risk in dividend sustainability.
Considerations
- Economic Conditions: Broader economic conditions can impact a company’s earnings, thus affecting the dividend cover.
- Sector Variations: Different industries may have varying benchmark ratios for healthy dividend cover.
Related Terms
- Dividend Yield: The ratio of annual dividends per share to the share price.
- Payout Ratio: The proportion of earnings paid out as dividends to shareholders.
Comparisons
- Times Covered vs. Payout Ratio: While Times Covered focuses on earnings relative to dividends, the Payout Ratio emphasizes the proportion of earnings distributed.
Interesting Facts
- Companies with very high dividend covers might be undervaluing dividends, thus potentially underrewarding shareholders.
- Tech companies often have lower dividend covers due to higher reinvestment in growth opportunities.
Famous Quotes
“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” - Benjamin Graham
Proverbs and Clichés
- “Don’t put all your eggs in one basket.” (Pertinent to relying solely on high dividend cover for investment decisions)
Jargon and Slang
- Dividend Aristocrats: Companies with a strong history of consistently increasing dividends, often associated with high dividend cover.
FAQs
What is a good Times Covered ratio?
Can Times Covered be negative?
How can Times Covered impact stock prices?
References
- Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management. Cengage Learning.
- Investopedia. (n.d.). Dividend Cover.
Summary
Times Covered is a critical financial metric that provides insights into a company’s ability to sustain its dividend payments. It reflects the balance between retained earnings and dividends paid, offering a comprehensive view of financial stability and growth potential. By understanding this metric, investors can make informed decisions and better assess the long-term viability of their investments.
