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 Marathon Petroleum (NYSE: MPC ) 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.
Marathon Petroleum yields 2.3%, a bit higher than the S&P's 1.9%.
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.
Marathon has a payout ratio of 83%.
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 debt-to-equity ratio is a good measure of a company's total debt burden. We can also look at interest payments as a percentage of interest revenue for a quick way to gauge how comfortably these companies can afford to make their interest payments.
Let's examine how Marathon Petroleum stacks up next to its peers:
|
Company
|
Debt-to-Equity Ratio
|
Interest Payments/Interest Revenue
|
|
Marathon Petroleum
|
36%
|
102 times
|
|
Valero Energy (NYSE: VLO )
|
48%
|
5 times
|
|
ConocoPhillips (NYSE: COP )
|
39%
|
19 times
|
|
Hess (NYSE: HES )
|
29%
|
11 times
|
Source: Capital IQ, a division of Standard & Poor's.
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.
Marathon Petroleum doesn't have an earnings or dividend history because it was recently spun off by Marathon Oil (NYSE: MRO ) . However, since 2006, Marathon Oil's after-tax profits from its refining business grew (with a fair degree of volatility) at a rate of about 2%, while the company's dividend increased at a 4% rate.
The Foolish bottom line
Marathon Petroleum exhibits a fairly clean dividend bill of health. It has a reasonable payout ratio, debt load, and earnings growth. Dividend investors may want to keep an eye of the company's earnings consistency since a prolonged period of weak earnings could put some stress on the dividend, though its strong balance sheet should go a long way to helping the dividend weather the inevitable storms.
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