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 it's changed over the past five years.
The company we're looking at today is Lazard
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.
Lazard Dividend Chart by YCharts
Lazard's dividend has risen three times in the last 5 years and now rests at $0.16 per quarter.
Immediate safety
To understand how safe a dividend is, we use two crucial tools, first:
- 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.
Lazard Times Interest Earned TTM Chart by YCharts
Lazard covers every $1 in operating expense with $5 in operating earnings.
Sustainability
The other tool we use to evaluate the safety of a dividend is:
- 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.
Despite dropping below zero in 2007 and spiking briefly in 2009, Lazard has generally maintained a low free cash flow payout ratio.
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