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 Huntsman (NYSE: HUN), which yields 4.1%.

Industry
Huntsman is a chemical company that, like competitors Dow Chemical (NYSE: DOW) and Dupont (NYSE: DD) , has been benefiting from the rising price for titanium dioxide. The past five years the company flirted with disaster after getting hit hard by the recession and a failed buyout from private equity firm Apollo.

Huntsman Corporation 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 has it grown.

Huntsman Corporation Dividend Chart by YCharts

Huntsman has consistently paid a dividend of $0.10 per quarter for the past five years.

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, which is 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. A ratio less than 1.5 is questionable; a number less than 1 means the company is not bringing in enough money to cover its interest expenses.

Huntsman Corporation Times Interest Earned TTM Chart by YCharts

Huntsman covers every $1 in interest expense with nearly $3 in operating earnings.

Sustainability
The 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'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.

Source: S&P Capital IQ.

Huntsman's payout ratios have been all over the place, as has its business.

Alternatives

Source: S&P Capital IQ.

There are some alternatives in the industry, though none with as high of a yield. Coming closest is Kronos Worldwide (NYSE: KRO), with a 3.4% trailing yield and a 23% earnings payout ratio. Next up is Eastman Chemical (NYSE: EMN), with an 2.8% trailing yield and 22% payout ratio. Last but not least is Sherwin-Williams (NYSE: SHW), with a 1.7% trailing yield and a 31% payout ratio.

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.

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