RadioShack's Dividend Is Safe

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 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 percentage of free cash flow devoted toward paying the dividend. Again, a ratio greater 80% could be a red flag.

Let's examine RadioShack (NYSE: RSH  ) and three of its peers.

Company	Yield	Interest Coverage	EPS Payout Ratio	FCF Payout Ratio
RadioShack	1.9%	8.6	15.3%	12.4%
Wal-Mart Stores (NYSE: WMT  )	2.7%	11.4	27.8%	55.5%
Best Buy (NYSE: BBY  )	2.1%	26.9	19.2%	72.6%
Target (NYSE: TGT  )	2.1%	7.0	24.4%	19.1%

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

With an interest coverage of 8.6, RadioShack covers every $1 in interest expenses with more than $8 in operating earnings. Given that its EPS payout ratio and FCF payout ratio are below 20%, you shouldn't have to worry that RadioShack will need to cut its dividend anytime soon. As a whole, the company has been doing OK, but some analysts are wondering whether RadioShack is a sell.

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 RadioShack to MyWatchlist.
• Add Wal-Mart Stores to MyWatchlist.
• Add Best Buy to MyWatchlist.
• Add Target to MyWatchlist.