L-3 Communications' Dividend Is Safe

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 reflect dividends paid in the trailing 12 months, while yields are the expected forward yield. 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	2.6%	6.7	19.9%	22.4%
Lockheed Martin (NYSE: LMT  )	5.1%	11.5	8.8%	39.5%
Northrop Grumman (NYSE: NOC  )	3.5%	14.0	7.0%	24.3%
United Technologies (NYSE: UTX  )	2.6%	12.3	34%	29.7%

Source: S&P Capital IQ.

With an interest coverage of 6.7, L-3 Communications covers every $1 in interest expenses with almost $7 in operating earnings. Given its EPS payout ratio and FCF payout ratio are below 25%, you shouldn't have to worry that L-3 Communications 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.