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 see how that's changed over the past five years.
The company we're looking at today is Celanese
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.
Celanese's dividend was stead at $0.04 per quarter before it began rising in 2010. In two years, the dividend was raised twice, to where it now sits at $0.06 per quarter.
To understand how safe a dividend is, we use two 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.
At 3.13, for every $1 in interest expense Celanese earns $3 in operating earnings.
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.
Source: S&P Capital IQ.
Celanese's earnings payout ratio jumped with the financial crisis, but otherwise it has been steady in the single digits.
Another tool for better investing
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- Add Celanese to My Watchlist.
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