By
Dan Dzombak
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More Articles
October 29, 2011
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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 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 than 80% could be a red flag.
Each of these ratios reflect dividends paid in the trailing 12 months; yields are the expected forward yield. Let's examine News Corp. (Nasdaq: NWSA ) and three of its peers.
|
Company
|
Yield
|
Interest Coverage
|
EPS Payout Ratio
|
FCF Payout Ratio
|
| News Corp. |
1% |
5.2 |
15.4% |
11% |
| CBS (NYSE: CBS ) |
1.5% |
5.1 |
14.5% |
8.9% |
| Walt Disney (NYSE: DIS ) |
1.1% |
18.7 |
17% |
21.2% |
| Time Warner (NYSE: TWX ) |
2.6% |
4.4 |
38.6% |
10.3% |
Source: S&P Capital IQ.
With an interest coverage of 5.2, News Corp. covers every $1 in interest expenses with $5 in operating earnings. Given that its EPS payout ratio and FCF payout ratio are below 20%, you shouldn't have to worry that News Corp. will need to cut its dividend anytime soon.
Another tool for better investing
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