Monsanto: Dividend Dynamo or the Next Blowup?

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Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.

Let's examine how Monsanto (NYS: MON) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.

1. Yield
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.

Monsanto yields 1.8%, almost in line with the S&P's 1.9%.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.

Monsanto's payout ratio is 38%.

3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than 5 is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

Monsanto has a debt-to-equity ratio of 19% and an interest coverage of 15 times.

4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

Let's examine how Monsanto stacks up next to its peers:

Company

5-Year Earnings-Per-Share Growth Rate

5-Year Dividend Growth Rate

Monsanto18%24%
Mosaic (NYS: MOS) N/A*0%
Potash Corp. of Saskatchewan (NYS: POT) 37%25%
DuPont (NYS: DD) 0%2%

Source: Capital IQ, a division of Standard & Poor's. * Negative equity.

The Foolish bottom line
Monsanto exhibits a fairly clean dividend bill of health. It has limited debt and high earnings growth. Given the company's low payout ratio, it could probably even afford to raise its payouts.

To stay up to speed on the top news and analysis on Monsanto or any other stock, add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

At the time this article was published Ilan Moscovitzdoesn't own shares of any companies mentioned. You can follow him on Twitter@TMFDada.Motley Fool newsletter serviceshave recommended creating a synthetic long position in Monsanto. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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