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 Whirlpool
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.
Whirlpool's dividend had been steady at $0.43 per quarter since 2004 until it was rasied in 2011 to $0.50 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.
Whirlpool covers every $1 in interest expense with more than $3 in operating earnings.
The other tool we use to evaluate the safety of a dividend is:
- 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.
Whirlpool's payout ratio has historically been low. With the raise in dividend, it jumped to nearly 50% but has since come back down to around 40%, a very low level.
Another tool for better investing
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- Add Whirlpool to My Watchlist.
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