Dividend Cover

The number of times a company’s *dividends to ordinary share­ holders could be paid out of its *net profits after tax in the same period. For example, a net dividend of £400,000 paid by a company showing a net profit of £1M is said to be covered 2½ times. Dividend cover is a measure of the proba­ bility that dividend payments will be sus­tained (low cover might make it difficult to pay’ the same level of dividends in a bad year’s trading) and of a companys’ commitment to investment and growth (high co-1er implies that the company retains its earnings for investment in the business). A negative dividend cover is unusual and is taken as a sign that a company is in difficulties. In the USA, the dividend cover is expressed as the pay­ out ratio. The total dividends are paid as a percentage of the net profit. See also. PRICE- DIVIDEND RATIO.