CVS Caremark's Dividend Is Safe

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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'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.

Each of these ratios reflects dividends paid in the trailing 12 months, while yields are the expected forward yield. Let's examine CVS Caremark (NYS: CVS) and three of its peers.

Company

Yield

Interest Coverage

EPS Payout Ratio

FCF Payout Ratio

CVS Caremark

1.4%

10.9

17.3%

13.4%

Walgreen (NYS: WAG)

2.7%

55.4

25.5%

29.2%

Omnicare (NYS: OCR)

0.6%

2.9

(36.1%)

0.7%

Aetna (NYS: AET)

1.6%

11.7

7.4%

4.3%

Source: S&P Capital IQ.

With an interest coverage of 10.9, CVS Caremark covers every $1 in interest expenses with almost $11 in operating earnings. Given that its EPS payout ratio and FCF payout ratio are below 20%, you shouldn't have to worry that CVS Caremark will need to cut its dividend anytime soon.

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At the time this article was published

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