By
Dan Dzombak
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More Articles
May 21, 2011
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Dividend investors know that it pays to follow how much of a company's money goes toward funding its payouts. 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 1 means that the company is not bringing in enough money to cover its interest expenses.
- 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 percentage of free cash flow devoted toward paying the dividend. Again, a ratio greater 80% could be a red flag.
Let's examine Quaker Chemical (NYSE: KWR ) and three of its peers.
|
Company
|
Yield
|
Interest Coverage
|
EPS Payout Ratio
|
FCF Payout Ratio
|
| Quaker Chemical |
2.3%
|
10.5
|
33.0%
|
91.3%
|
| Chase (AMEX: CCF ) |
2.1%
|
49.2
|
24.4%
|
22.6%
|
| RPM International (NYSE: RPM ) |
3.6%
|
5.3
|
60.1%
|
44.4%
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| Huntsman (NYSE: HUN ) |
2.1%
|
2.6
|
36.4%
|
NM
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Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful because of negative free cash flow.
With an interest coverage of 10.5, Quaker Chemical covers every $1 in interest expenses with $10.50 in operating earnings. Although its EPS payout ratio is below 35%, investors should keep a careful eye on its FCF payout ratio, which stands at 91.3%.
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