Olin: Dividend Dynamo or Blowup?
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 Olin (NYS: OLN) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.
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.
Olin yields 4.1%, considerably higher than 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.
Olin's payout ratio is a modest 30%. The company's earnings were heavily affected by non-operational issues like restructuring charges and gains on investments. If we adjust for those factors, Olin's payout ratio is a moderate-but-still-respectable 56%.
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.
Olin's debt-to-equity ratio is 59%, while its interest coverage rate is 6 times. This is a bit better than those of its peers.
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 Olin stacks up next to its peers:
5-Year Earnings-per-Share Growth
5-Year Dividend Growth
Westlake Chemical (NYS: WLK)
Dow Chemical (NYS: DOW)
Solutia (NYS: SOA)
Source: Capital IQ, a division of Standard & Poor's. *Solutia has had historically lumpy earnings.
The Foolish bottom line
Olin exhibits a clean dividend bill of health. It has a reasonable payout ratio and relatively moderate amounts debt for its industry. Given its payout ratio and earnings growth, Olin could probably afford to increase its dividend in the near future.
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At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any companies mentioned. You can follow him on Twitter@TMFDada. 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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