Dividend investors know that it pays to follow how much of a company's money goes toward funding its payouts. 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 percentage of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.
Each of these ratios reflect dividends paid in the trailing 12 months; yields are the expected forward yield. Let's examine Frontier Communications
Company |
Yield |
Interest Coverage |
EPS Payout Ratio |
FCF Payout Ratio |
---|---|---|---|---|
Frontier Communications |
12.5% |
1.6 |
468.8% |
64.7% |
Windstream |
8.4% |
2.1 |
181.8% |
99.2% |
CenturyLink |
8.4% |
3.3 |
142.9% |
40.1% |
AT&T |
5.9% |
6.1 |
21.7% |
129.8% |
Source: S&P Capital IQ.
With an interest coverage of 1.6, Frontier Communications covers every $1 in interest expenses with just $1.6 in operating earnings. While its EPS payout ratio is an astronomical 468%, Frontier's earnings don't tell the whole story. Two years ago, Frontier made a game changing acquisition, buying Verizon's
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 Frontier Communications to My Watchlist.
- Add Windstream to My Watchlist.
- Add CenturyLink to My Watchlist.
- Add AT&T to My Watchlist.