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%.

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

Huntsman Corporation Total Return Price Chart by YCharts

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

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

Huntsman Corporation Times Interest Earned TTM Chart by YCharts

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

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.


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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