By
Dan Dzombak
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More Articles
July 14, 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 12 months while yields are the expected forward yield. Let's examine Buckeye Technologies (NYSE: BKI ) and three of its peers.
|
Company
|
Yield
|
Interest Coverage
|
EPS Payout Ratio
|
FCF Payout Ratio
|
| Buckeye Technologies |
0.7% |
10.7 |
4.4% |
4.7% |
| Weyerhaeuser (NYSE: WY ) |
2.7% |
1.3 |
8.6% |
23.2% |
| Rayonier (NYSE: RYN ) |
3.2% |
5.6 |
77.9% |
53.4% |
| International Paper (NYSE: IP ) |
3.5% |
3.4 |
21.3% |
18.7% |
Source: Capital IQ, a division of Standard & Poor's.
With an interest coverage ratio of 10.7, Buckeye Technologies covers every $1 in interest expenses with just under $11 in operating earnings. Given its EPS payout ratio and FCF payout ratio are below 10%, you shouldn't have to worry that Buckeye Technologies will need to cut its dividend anytime soon.
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