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 one 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.
Let's examine Golar LNG
Company |
Yield |
Interest Coverage |
EPS Payout Ratio |
FCF Payout Ratio |
---|---|---|---|---|
Golar LNG | 3.3% | 2.3 | 306.0% | 71.2% |
Cheniere Energy Partners
|
10.2% | 1.3 | 603.3% | 633.7% |
Royal Dutch Shell |
4.8% | 27.6 | 44.1% | 139.5% |
ExxonMobil |
2.4% | 200.3 | 25.1% | 44.7% |
Source: Capital IQ, a division of Standard & Poor's.
With an interest coverage ratio of 2.3, Golar LNG covers every $1 in interest expenses with $2.3 in operating earnings. While its EPS payout ratio is almost 310%, its FCF payout ratio tells the real story at 71%. As such, you shouldn't have to worry that Golar LNG 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 Golar LNG to My Watchlist.
- Add Cheniere Energy Partners to My Watchlist.
- Add Royal Dutch Shell to My Watchlist.
- Add ExxonMobil to My Watchlist.