By
Dan Dzombak
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More Articles
November 23, 2011
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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' 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 Albemarle (NYSE: ALB ) and three of its peers.
|
Company
|
Yield
|
Interest Coverage
|
EPS Payout Ratio
|
FCF Payout Ratio
|
| Albemarle |
1.3% |
15.6 |
13.9% |
33.3% |
| RPM International (NYSE: RPM ) |
3.7% |
5.3 |
55.7% |
100.7% |
| Cytec Industries (NYSE: CYT ) |
1.1% |
6.3 |
9.0% |
16.4% |
| FMC (NYSE: FMC ) |
0.7% |
14.5 |
17.7% |
11.0% |
Source: S&P Capital IQ.
With an interest coverage of 15.6, Albemarle covers every $1 in interest expenses with $15 in operating earnings. Given that its EPS payout ratio and FCF payout ratio are also solid, at 13.9% and 33.3% respectively, you shouldn't have to worry that Albemarle will need to cut its dividend anytime soon.
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