By
Dan Dzombak
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More Articles
June 11, 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 Chicago Bridge & Iron (NYSE: CBI ) and three of its peers.
|
Company
|
Yield
|
Interest Coverage
|
EPS Payout Ratio
|
FCF Payout Ratio
|
| Chicago Bridge & Iron |
0.6%
|
18.5
|
2.4%
|
7.5%
|
| Halliburton (NYSE: HAL ) |
0.7%
|
11.3
|
15.3%
|
(120.9%)
|
| KBR (NYSE: KBR ) |
0.6%
|
20.5
|
8.1%
|
5.0%
|
| Fluor (NYSE: FLR ) |
0.8%
|
55.6
|
25.0%
|
12.0%
|
Source: Capital IQ, a division of Standard & Poor's.
With an interest coverage of 18.5, Chicago Bridge & Iron covers every $1 in interest expenses with $18.50 in operating earnings. Given that its EPS payout ratio and FCF payout ratio are below 10%, you shouldn't have to worry that Chicago Bridge & Iron will need to cut its dividend anytime soon.
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