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 Waste Management (NYSE: WM ) 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.
Waste Management yields 4.1%, a fair bit higher than 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.
Waste Management has a moderate payout ratio of 66%.
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.
Let's examine how Waste Management stacks up next to its peers:
|
Company
|
Debt-to-Equity Ratio
|
Interest Coverage
|
|
Waste Management
|
137%
|
4 times
|
|
Republic Services (NYSE: RSG )
|
95%
|
3 times
|
|
Stericycle (Nasdaq: SRCL )
|
99%
|
10 times
|
|
Waste Connections (NYSE: WCN )
|
83%
|
8 times
|
Source: S&P Capital IQ.
Waste Management has a moderately high debt burden, though that's fairly normal for its capital-intensive industry. Its interest coverage is a bit low, but reasonable given the stability of its earnings.
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.
Waste Management's earnings have basically been flat over the past five years, while its dividend has grown at a rate of 9%.
The Foolish bottom line
Waste Management exhibits a fairly strong dividend bill of health. It has a nice yield and a reasonable debt burden. Given its already moderate payout ratio, dividend investors will want to keep an eye on earnings growth to ensure that the company is able to continue growing its dividend. To stay up to speed on the latest developments and analysis on Waste Management, or any other stock, add it to your stock watchlist. If you don't have one yet, you can create a free, personalized watchlist of your favorite stocks by clicking here.
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