Huntsman: 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 Huntsman (NYS: HUN) 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.

Huntsman yields 2.9%, quite a bit higher than the S&P's 2%.

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.

Huntsman has a modest payout ratio of 39%.

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 five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

Huntsman has a sizable debt-to-equity ratio of 333% and an interest coverage rate of three times. That's about in-line with peers such as Dow Chemical, but high leverage does rely on steady operating income.

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.

Huntsman's earnings plunged during the economic downturn, declining so far as to record a slight loss in 2010 before rebounding last year. All told, Huntsman's earnings have shrunk at an average annual rate of 5% while its dividend has remained steady at $0.10 per share since early 2007. Analysts do, however, expect earnings to continue improving significantly.

The Foolish bottom line
So is Huntsman a dividend dynamo? Probably not -- at least not yet. It has an above average yield and a modest payout ratio. However, dividend investors will want to see Huntsman demonstrate consistently growing earnings and the desire to use its growing earnings and low payout ratio to raise its dividend. However, if you're looking for some solid dividend stocks, I suggest you check out "Secure Your Future With 11 Rock-Solid Dividend Stocks," a special report from The Motley Fool about some serious dividend dynamos. I invite you to grab a free copy to discover everything you need to know about these 11 generous dividend payers -- simply click here.

At the time this article was published Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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

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