MB Capital Strategies Glossary — Updated June 2026
The cash flow coverage ratio measures how many times a company's operating cash flow covers its financial obligations — debt service payments, lease obligations, and dividends. It's one of the most reliable indicators of dividend sustainability for commodity and shipping stocks.
For dividend analysis specifically, the dividend coverage ratio variant is more relevant:
This is the inverse of the payout ratio and directly tells you how much FCF buffer exists above the dividend.
Above 2.0x: Very safe dividend — FCF is twice the dividend payout. Company has capacity to grow the dividend or build cash reserves even if earnings dip moderately.
1.2x - 2.0x: Comfortable — normal for cyclical businesses in an average/good year. Monitor for cycle deterioration.
1.0x - 1.2x: Tight — any earnings weakness pushes coverage below 1.0x. Warning zone for cyclical businesses where freight rates or commodity prices can swing 30-50%.
Below 1.0x: Dividend is being paid from debt or cash reserves — unsustainable. Dividend cut risk is very high.
Shipping: Variable dividend companies (TORM, Frontline) are designed to maintain 1.0x-1.2x coverage automatically — they pay out most FCF quarterly. The coverage is maintained because the dividend adjusts WITH earnings. Look instead at absolute FCF and freight rate trends.
Mining: Fixed dividend + variable component is common (BHP, Rio Tinto). Core fixed dividend should have coverage >3x through commodity cycle troughs. Special dividends require >1.5x incremental coverage. AISC matters — lower AISC = better coverage at low commodity prices.
REITs: Use FFO payout ratio (Funds From Operations) instead of FCF, since real estate depreciation distorts standard cash flow. FFO coverage of 1.2-1.5x is typical for well-run REITs.
The Debt Service Coverage Ratio (DSCR) is a related but different metric used by banks when issuing ship financing or project finance loans. DSCR = Net Operating Income ÷ Total Debt Service (principal + interest). Banks typically require DSCR >1.25x as a loan covenant — falling below this can trigger technical default or forced asset sales even when a company appears operationally healthy.
Payout Ratio · Free Cash Flow · Cash Flow · Dividend Cut · EBITDA · Net Debt/EBITDA
About Marco Bozem · Full Glossary · Best Tanker Stocks 2026
Marco Bozem
Investor & Analyst | Hard Assets, Dividends, Shipping | MB Capital Strategies
Marco analyzes commodity and dividend stocks with focus on Shipping, Mining, and Energy. All analysis is based on publicly available reports and personal judgment. Not investment advice.