Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.
Let's examine how Hershey (NYSE: HSY ) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.
1. Yield
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.
Hershey yields 2.5% -- somewhat higher than the market average.
2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.
Hershey's payout ratio is a moderate 55%.
3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
Hershey's debt-to-equity ratio is 202%. Its interest coverage rate is 10 times.
4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Let's examine how Hershey stacks up next to its peers:
|
Company
|
5-Year Annual Earnings-per-share growth
|
5-Year Annual Dividend Growth
|
|
Hershey
|
41%
|
4%
|
|
Tootsie Roll Industries (NYSE: TR )
|
(6%)
|
4%
|
|
ConAgra Foods (NYSE: CAG )
|
16%
|
(2%)
|
|
Kraft (NYSE: KFT )
|
(2%)
|
5%
|
Source: Capital IQ, a division of Standard & Poor's.
Hershey's massive earnings growth reflects a long rebound to near-2006 levels from an earnings collapse that occurred in early 2007.
The Foolish bottom line
Hershey displays a fairly clean dividend bill of health. It has a moderate payout ratio, and its earnings have bounced back. Dividend investors might want to keep an eye on Hershey's fairly significant leverage and earnings stability.
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