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's 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 reflects dividends paid in the trailing 12 months, while yields are the expected forward yield. Let's examine Teck Resources
Company |
Yield |
Interest Coverage |
EPS Payout Ratio |
FCF Payout Ratio |
---|---|---|---|---|
Teck Resources |
1.5% |
6.6 |
7.4% |
25.7% |
Southern Copper |
7.7% |
17.4 |
82.7% |
127.9% |
Freeport-McMoRan Copper & Gold |
2.3% |
32.0 |
15.7% |
15.9% |
Alcoa |
1.1% |
4.1 |
12.6% |
10.2% |
Source: S&P Capital IQ.
With an interest coverage ratio of 6.6, Teck Resources covers every $1 in interest expenses with more than $6.50 in operating earnings. Given that its EPS payout ratio and FCF payout ratio are below 30%, you shouldn't have to worry that Teck Resources will need to cut its dividend anytime soon.
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 Teck Resources to My Watchlist.
- Add Southern Copper to My Watchlist.
- Add Freeport-McMoRan Copper & Gold to My Watchlist.
- Add Alcoa to My Watchlist.