Southern Copper's Dividend X-Ray

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Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a company to understand the quality of its dividend and see how that's changed over the past five years.

The company we're looking at today is Southern Copper (NYS: SCCO) , which yields 7.8%.

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.

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Southern Copper Corporation Dividend Chart by YCharts

Southern Copper's dividend dipped with the financial crisis but has since come back strong.

Immediate safety
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.
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Southern Copper Corporation Times Interest Earned TTM Chart by YCharts

Southern Copper covers every $1 in interest expense with more than $18 in operating earnings.

Sustainability
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.
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Source: S&P Capital IQ.

Southern Copper's payout ratio spiked with the financial crisis before the company cut its dividend. The payout ratio now sits at a high 80%.

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.

For more dividend stock ideas, get The Motley Fool's free report "11 Rock-Solid Dividend Stocks."

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.

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