Adidas' Dividend Sustainability: A Crisis Brewing Beneath the Surface

The recent surge in Adidas (ADDYY)'s stock price has been fueled by strong top-line growth and operational improvements. However, beneath the headline figures lie troubling financial stress signals that cast serious doubt on the sustainability of its dividend. With free cash flow coverage ratios collapsing, debt metrics under strain, and earnings volatility resurfacing, investors face a stark reality: the dividend that has long been a cornerstone of the stock's appeal may be on the brink of a catastrophic cut.

Free Cash Flow Coverage: A Red Flag Flapping in the Wind

The most glaring warning sign is the deterioration in free cash flow (FCF) coverage, a critical metric for sustaining dividend payouts. For Q1 2025, Adidas reported an FCF coverage ratio of 0.81, meaning free cash flow fell short of operating cash flow by 19%. Over the trailing twelve months (TTM), this ratio plunged further to 0.70, signaling a systemic inability to generate sufficient FCF to cover its operational cash needs.

A ratio below 1.0 is a flashing yellow light—when sustained, it indicates a company is eroding its liquidity to fund operations. For a firm reliant on inventory-heavy retail cycles, this is particularly perilous. Adidas' Q1 2025 free cash flow turned negative at -€1.08 billion, while its TTM FCF, though positive at €1.74 billion, is now 35% lower than the 2023 level. With dividend payouts rising 16% to €5.064 per share in 2024, the math grows increasingly unsustainable.

Debt Metrics: The Leveraged Tightrope

While Adidas has reduced its debt-to-equity ratio to 0.66 (from 0.99 in 2023), the absolute debt burden remains elevated at €3.62 billion. The company's net leverage ratio (net debt/EBITDA) improved to 1.6x in 2024, but this is still a precarious position for a firm facing rising interest rates and volatile working capital demands.

A key vulnerability lies in operating working capital, which rose 15% to €5.46 billion in Q1 2025. This reflects aggressive inventory builds (up 11% to €5.0 billion) to meet demand, but it also ties up cash that could otherwise fund dividends. With accounts receivable rising 26% due to extended payment terms from retailers, liquidity pressures are mounting. Should sales slow—whether due to U.S. tariffs or shifting consumer preferences—the strain on debt service could force dividend cuts.

Earnings Volatility: The Ghost of Past Crises

Adidas' 2024 results showcased stabilized earnings, with currency-neutral revenue growth of 12% and a 400% surge in operating profit. However, this stability masks deeper fragility. The removal of Yeezy sales—a once-volatile revenue stream—has been offset by new risks:

1. Tariff Uncertainty: CEO Bjørn Gulden highlighted U.S. tariff threats as a “major risk,” which could force price hikes and erode margins.
2. Inventory Overhang: The €5.0 billion inventory pile, while “managed,” risks write-downs if demand falters.
3. Geopolitical Headwinds: China's slowing growth and protectionist policies threaten Adidas' second-largest market.

The company's gross margin, now at 52.1%, is paper-thin against these threats. Even a 1% margin contraction could wipe out dividend coverage.

The Dividend: A House Built on Sand

Adidas' dividend has been a beacon of stability, with payouts rising 16% in 2024. But this growth is now at odds with its FCF trajectory. In 2024, the dividend payout ratio (dividends/FCF) spiked to 138%, meaning the company paid out more in dividends than it generated in free cash flow.

With FCF coverage ratios below 1.0 and earnings volatility resurfacing, the dividend is a ticking time bomb. A cut would not only crush shareholder returns but also trigger a ratings downgrade, raising borrowing costs and compounding the crisis.

Investor Action: Cut Ties Before the Fall

The writing is on the wall for Adidas' dividend. With FCF coverage eroding, debt leverage still elevated, and macro risks looming, investors should:

1. Exit Positions: Sell holdings before the dividend cut announcement, which could come as early as 2026.
2. Avoid New Entries: Resist the allure of a “value” stock—Adidas' P/FCF ratio of 24.25 (as of May 2025) is unsustainable without FCF growth.
3. Monitor Metrics: Track FCF coverage and net debt/EBITDA ratios quarterly. A further drop below 0.7 or a leverage ratio exceeding 2.0 should trigger panic sells.

Conclusion: A Dividend in Free Fall

Adidas' financials reveal a company stretched to its limits. The dividend, once a symbol of strength, is now a liability that could unravel shareholder value. With free cash flow coverage in free fall and debt metrics under pressure, investors must act decisively—before the music stops.