Is McCormick'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' 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 McCormick (NYSE: MKC  ) and three of its peers.

Company	Yield	Interest Coverage	EPS Payout Ratio	FCF Payout Ratio
McCormick	2.2%	10.6	37.7%	55.0%
H.J. Heinz (NYSE: HNZ  )	3.4%	5.9	59.6%	52.0%
J. M. Smucker (NYSE: SJM  )	2.3%	13.4	38.7%	42.3%
Campbell Soup (NYSE: CPB  )	3.3%	10.6	47.9%	59.2%

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

With an interest coverage of 10.6, McCormick covers every $1 in interest expenses with more than $10 in operating earnings. Given its EPS payout ratio and FCF payout ratio are below 55%, you shouldn't have to worry that McCormick 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 McCormick to My Watchlist.
• Add H.J. Heinz to My Watchlist.
• Add J.M. Smucker to My Watchlist.
• Add Campbell Soup to My Watchlist.