Is Hershey's Dividend Safe?

As a dividend investor, it pays to follow how much of a company's money goes toward funding its dividend. A nice yield now won't matter much if the company can't keep making those payments going forward.

Here, we'll highlight a given company and its closest competitors to see just how safe their dividends are, with a little help from three crucial tools:

• The interest coverage ratio, or earnings before interest and taxes, divided by interest expense. The interest coverage ratio measures a company's ability to pay the interest on its debt. An interest coverage ratio less than 1.5 is questionable; a number less than one means that the company is not bringing in enough money to cover its interest expenses.

• The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.

• The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business's health. The FCF payout ratio measures the percent of free cash flow devoted toward paying the dividend. Again, a ratio greater 80% could be a red flag.

Let's examine Hershey (NYSE: HSY  ) and three of its peers.

Company	Yield	Interest Coverage	EPS Payout Ratio	FCF Payout Ratio
Hershey	2.4%	10.5	57.6%	49.4%
Kraft Foods (NYSE: KFT  )	3.4%	4.0	67.3%	246.1%
Snyder's-Lance (Nasdaq: LNCE  )	3.2%	23.4	199.5%	(64.7%)
Tootsie Roll Industries (NYSE: TR  )	1.1%	452.3	34.6%	35%

Source: Capital IQ, a division of Standard & Poor's.

With an interest coverage of 10.5, Hershey covers every $1 in interest expenses with slightly over $10 in operating earnings. Given its EPS payout ratio and FCF payout ratio are roughly at 50%, you shouldn't have to worry that Hershey will need to cut its dividend anytime soon.

Another tool for better investing
Most investors don't keep tabs on their companies. That's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. We can help you keep tabs on your companies with My Watchlist, our free, personalized stock-tracking service.

• Add Hershey to My Watchlist.
• Add Kraft Foods to My Watchlist.
• Add Lance to My Watchlist.
• Add Tootsie Roll Industries to My Watchlist.