Dangerous dividend debt
The market did not much like the Netcare results as operational leverage all went the wrong way. Revenue was up 15.4%, profit after tax up 20.7% and earnings before interest, taxation, depreciation and amortisation (ebitda) up 13.6%, while headline earnings per share (HEPS) only grew 10.9%. You want HEPS to be the fastergrowing number, showing strong operational leverage. Take it a step further and the interim dividend was flat at 38c, but a line in the results stated that debt was higher in part because dividend was being paid from debt! I get what the directors are doing – keeping continuity with the dividend, in part, to protect the share price because a reduced dividend would spook the market. But paying dividends from debt can become a dangerous spiral and I would rather a company cut the dividend than fund it with debt.
Paying dividends from debt can become a dangerous spiral and I would rather a company cut the dividend than fund it with debt.