Applied Materials' Dividend Is 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's health. The FCF payout ratio measures the percent of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.

Let's examine Applied Materials (Nasdaq: AMAT  ) and three of its peers.

Company	Yield	Interest Coverage	EPS Payout Ratio	FCF Payout Ratio
Applied Materials	2.6%	123.8	24.4%	22.7%
Intel (Nasdaq: INTC  )	3.9%	2716.3	30.6%	47.7%
KLA-Tencor (Nasdaq: KLAC  )	2.6%	14.7	23.1%	47.7%
Texas Instruments (NYSE: TXN  )	1.7%	NM	18.8%	31.6%

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

With an interest coverage ratio of 123.8, Applied Materials covers every $1 in interest expenses with almost $124 in operating earnings. Given its EPS payout ratio and FCF payout ratio are below 25%, you shouldn't have to worry that Applied Materials will need to cut its dividend anytime soon. The company has been doing well and looks cheap as it trades with a P/E ratio of slightly more than 10.

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 Applied Materials to My Watchlist.
• Add Intel to My Watchlist.
• Add KLA-Tencor to My Watchlist.
• Add Texas Instruments to My Watchlist.