By
Dan Dzombak
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More Articles
June 30, 2011
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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 than 80% could be a red flag.
Each of these ratios reflect dividends paid in the trailing twelve months while yields are the expected forward yield. Let's examine Statoil (NYSE: STO ) and three of its peers.
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Company
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Yield
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Interest Coverage
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EPS Payout Ratio
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FCF Payout Ratio
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Statoil
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4.6%
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41.1
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46.3%
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31.1%
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ConocoPhillips (NYSE: COP )
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3.6%
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13.0
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27.8%
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37.4%
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ExxonMobil (NYSE: XOM )
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2.3%
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200.3
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25.1%
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44.7%
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Total SA (NYSE: TOT )
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5.8%
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45.8
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53.9%
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101.6%
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Source: Capital IQ, a division of Standard & Poor's.
With an interest coverage of 41.1, Statoil covers every $1 in interest expenses with more than $41 in operating earnings. Given its EPS payout ratio and FCF payout ratio are below 50%, you shouldn't have to worry that Statoil will need to cut its dividend anytime soon.
Another tool for better investing
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