Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a given company to understand the quality of its dividend and how that's changed over the past five years.
The company we're looking at today is Corning (NYSE: GLW ) , which yields 2%.
Industry
Corning is a specialty glassmaker that provides glass for LCD televisions, touchscreen devices, and also LCDs. In 2008, Corning's stock as well as that of its competitors AU Optronics (NYSE: AUO ) and LG Philips LCD (NYSE: LPL ) was crushed as demand for LCD TVs fell and there was an oversupply in the industry. Demand began coming back in 2009 and has been growing steadily since.
Corning Total Return Price Chart by YCharts
Dividend
To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years, and if so, how much it has grown.
Corning Dividend Chart by YCharts
Corning started paying a $0.05 quarterly dividend in 2007, which it raised to $0.075 a quarter last month.
Immediate safety
To understand how safe a dividend is, we use three crucial tools, the first of which is:
- The interest coverage ratio or the number of times interest is earned, calculated by 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.
Corning Times Interest Earned (TTM) Chart by YCharts
At 21.2, Corning has $21 in operating earnings for every dollar of interest expense. That is more than enough, and the ratio has been growing steadily since late 2009.
Sustainability
The other tools we use to evaluate the safety of a dividend are:
- 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 percent of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.
Source: S&P Capital IQ.
Corning's payout ratios have been keeping steady under 20% for roughly a year and a half. While the ratio did go above 100% in 2009, since that time the company has maintained positive earnings and free cash flow and a low payout ratio.
Alternatives
Source: S&P Capital IQ.
There are some alternatives out there in the industry. General Electric (NYSE: GE ) has a yield double that of Corning, but its payout ratio is four times Corning's at 45%. 3M (NYSE: MMM ) shareholders enjoy a 35% larger dividend than Corning shareholders, but again, a significantly higher payout ratio. TE Connectivity's (NYSE: TEL ) yield is roughly equal to Corning's but with double the payout ratio. Were Corning to raise its dividend further than $0.08 a quarter to bring its payout ratio in line with peers', the shares could do very well.
Another tool for better investing
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