Is Ashland'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 1 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 Ashland (NYSE: ASH  ) and three of its peers.

Company	Yield	Interest Coverage	EPS Payout Ratio	FCF Payout Ratio
Ashland	1.2%	4.0	7.2%	9.6%
Dow Chemical (NYSE: DOW  )	2.8%	2.7	32.4%	93.2%
Hawkins (Nasdaq: HWKN  )	1.6%	NM	25%	37.2%
Zep (NYSE: ZEP  )	0.9%	7.6	24.7%	16.6%

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Hawkins had no interest payments during the period.

With an interest coverage ratio of 4, Ashland covers every $1 in interest expenses with $4 in operating earnings. Given its EPS payout ratio and FCF payout ratios are below 10%, you shouldn't have to worry that Ashland 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 MyWatchlist, our free, personalized stock-tracking service.

• Add Ashland to MyWatchlist.
• Add Dow Chemical to MyWatchlist.
• Add Hawkins to MyWatchlist.
• Add Zep to MyWatchlist.