NutriSystem's Dividend Is Safe

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 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 percentage of free cash flow devoted toward paying the dividend. Again, a ratio greater 80% could be a red flag.

Each of these ratios reflect dividends paid in the trailing 12 months; yields are the expected forward yield. Let's examine NutriSystem (Nasdaq: NTRI  ) and three of its peers.

Company	Yield	Interest Coverage	EPS Payout Ratio	FCF Payout Ratio
NutriSystem	4.9%	126.9	80.5%	80%
Weight Watchers International (NYSE: WTW  )	0.9%	5.7	23.5%	15.1%
Avon Products (NYSE: AVP  )	3.3%	13.8	54.9%	120.6%
Herbalife (NYSE: HLF  )	1.4%	42.3	18.1%	21.8%

Source: Capital IQ, a division of Standard & Poor's.

With an interest coverage of 126.9, NutriSystem covers every $1 in interest expenses with just under $130 in operating earnings. Given that its EPS payout ratio and FCF payout ratio are at 80%, you should be concerned that NutriSystem might need to cut its dividend in the future. While the company generated $25 million in free cash flow in the past four quarters, it also took out $30 million in debt to help buy back $75 million in shares and pay its $20 million dividend.

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 NutriSystem to My Watchlist.
• Add Weight Watchers International to My Watchlist.
• Add Avon Products to My Watchlist.
• Add Herbalife to My Watchlist.