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 80% could be a red flag.
Let's examine National Presto Industries (NYSE: NPK) and three of its peers.
|
Company |
Yield |
Interest Coverage |
EPS Payout Ratio |
FCF Payout Ratio |
|---|---|---|---|---|
| National Presto Industries | 7.9% | NA | 10.8% | 18.6% |
| Kimberly-Clark (NYSE: KMB) | 4.1% | 11.0 | 60.9% | 113.2% |
| Procter & Gamble (NYSE: PG) | 3.1% | 18.6 | 50.9% | 83.4% |
| Lennox International (NYSE: LII) | 1.5% | 13.3 | 31.3% | 336.1% |
Source: Capital IQ, a division of Standard & Poor's.
National Presto doesn't have debt, and as such, interest coverage is not applicable. Given that its EPS payout ratio and FCF payout ratio are below 20%, you shouldn't have to worry that National Presto 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 MyWatchlist, our free, personalized stock-tracking service.
- Add National Presto Industries to My Watchlist.
- Add Kimberly Clark to My Watchlist.
- Add Procter & Gamble to My Watchlist.
- Add Lennox International to My Watchlist.
