Is L-3 Communications' Dividend 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.

Let's examine L-3 Communications (NYSE: LLL  ) and three of its peers.

Company	Yield	Interest Coverage	EPS Payout Ratio	FCF Payout Ratio
L-3 Communications	2.1%	6.5	20.0%	21.8%
Lockheed Martin (NYSE: LMT  )	3.7%	11.4	34.2%	34.9%
Northrop Grumman (NYSE: NOC  )	3.1%	12.2	26.6%	21.7%
United Technologies (NYSE: UTX  )	2.2%	10.9	34.5%	26.1%

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

With an interest coverage of 6.5, L-3 covers every $1 in interest expenses with $6.50 in operating earnings. And given its EPS payout ratio and FCF payout ratio below 25%, you shouldn't have to worry that L-3 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 L-3 Communications to My Watchlist.
• Add Lockheed Martin to My Watchlist.
• Add Northrop Grumman to My Watchlist.
• Add United Technologies to My Watchlist.