Teva Pharmaceutical: Dividend Dynamo or Blowup?

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 Teva Pharmaceutical (Nasdaq: TEVA) 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.

Teva yields 1.9%, roughly in line with the average yield in the S&P 500.

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.

Teva's payout ratio is a modest 21%.

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 5 is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

Teva's debt-to-equity ratio is a reasonable 29%. Its interest coverage is 15 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 Teva stacks up next to its peers:

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

The Foolish bottom line
Teva exhibits a clean dividend bill of health. It has a moderate yield, a modest payout ratio, reasonable debt, and strong growth. Ordinarily, such a low payout ratio would suggest Teva could raise its payouts quite significantly, but those extra earnings are being reinvested in the business (through acquisitions, in large part) in order to produce rapid earnings growth. For now, dividend investors are looking at quickly growing payouts whose growth is driven by earnings improvements.

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