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 Fluor (NYSE: FLR) and three of its peers.

Company

Yield

Interest Coverage

EPS Payout Ratio

FCF Payout Ratio
Fluor

0.7%

55.6

25.0%

12.0%
KBR (NYSE: KBR)

0.6%

20.5

8.1%

5.0%
Chicago Bridge & Iron (NYSE: CBI)

0.5%

18.5

2.4%

7.5%
Foster Wheeler AG (Nasdaq: FWLT)

0.0%

15.1

0.0%

0.0%

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

With an interest coverage of 55.6, Fluor covers every $1 in interest expenses with $55 in operating earnings. Given that its EPS payout ratio and FCF payout ratio are at or below 25%, you shouldn't have to worry that Fluor will need to cut its dividend anytime soon.

Another tool for better investing
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