Freeport-McMoRan's Dividend X-Ray

Before you go, we thought you'd like these...
Before you go close icon

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 Freeport-McMoRan Copper & Gold (NYS: FCX) , which yields 2.3%.

Industry
Freeport-McMoRan Copper & Gold is a miner of copper and gold based in Phoenix. The stock was crushed in 2008 with the financial crisis because of its large debt load, but has since come back.

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.

Contrary to how it appears on the graph, Freeport-McMoRan Copper & Gold cut its dividend in 2009 and then reinstated it in 2010 at $0.15 per quarter. The company has since raised its dividend to $0.25 per quarter.

Immediate safety
To understand how safe a dividend is, we first look at:

  • The interest coverage ratioorthe number of times interest is earned, 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. An interest coverage 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.

Freeport-McMoRan covers every $1 in interest expense with $29 in operating earnings.

Sustainability
Another tool we use to evaluate how safe 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.
anImage

Source: S&P Capital IQ.

Freeport-McMoRan was unprofitable in 2008 and early 2009; at all other times, the company's payout ratio has been a low 20%.

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.

At the time this article was published FollowDan Dzombakon Twitter at@DanDzombakto check out his musings and see what articles he finds interesting. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners