Is Hershey's Dividend Safe?
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' health. The FCF payout ratio measures the percent of free cash flow devoted toward paying the dividend. Again, a ratio greater 80% could be a red flag.
Let's examine Hershey (NYS: HSY) and three of its peers.
EPS Payout Ratio
FCF Payout Ratio
|Kraft Foods (NYS: KFT)||3.4%||4.0||66.3%||131.4%|
|Snyder's-Lance (NAS: LNCE)||3.1%||13.6||(1,360.8%)||(70.7%)|
|Tootsie Roll Industries (NYS: TR)||1.3%||410.4||36.6%||50.1%|
Source: Capital IQ, a division of Standard & Poor's.
With an interest coverage of 10.5, Hershey covers every $1 in interest expenses with slightly over $10 in operating earnings. Given that its EPS payout ratio and FCF payout ratio are roughly at 50%, you shouldn't have to worry that Hershey will need to cut its dividend anytime soon.
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 MyWatchlist, our free, personalized stock-tracking service.
- Add Hershey to MyWatchlist.
- Add Kraft Foods to MyWatchlist.
- Add Lance to MyWatchlist.
- Add Tootsie Roll Industries to MyWatchlist.
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