Is BT’s almost 7% dividend yield safe?
Let’s look at telecoms company BT Group (LSE: BT.A) to see if the firm can keep up that mighty almost 7% yield. I reckon businesses are only really worth the cash they can generate from trading and from assets, whether that happens immediately or in the future. It also takes cold, hard cash to pay a dividend, and that’s a good reason to focus on cash-generation when trying to work out a firm’s ability to deliver a dividend income for its investors. High borrowings means big interest payments, which suck the cash away so that not so much of it is available for the dividend. Sometimes, firms pay dividends and keep pushing them higher even when they really shouldn’t. If debts are high and there’s no free cash left over after paying interest and reinvesting in operations, they shouldn’t pay a dividend. But habits are hard to break and many directors seem to worry about damage to a company’s reputation in the investment community. But an unvirtuous circle can soon develop with debts rising even higher, maybe because the dividends are really being funded by more borrowings. If you see that kind of situation unfolding, I think it’s a big red flag and the forward dividend payments could be at risk. If you are caught holding shares in a company that does trim its dividend, you’ll probably suffer a reduced income and capital losses from a falling share price – a double whammy!