Lowe's Dividend Is 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's health. The FCF payout ratio measures the percent of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.
Each of these ratios reflects dividends paid in the trailing 12 months, while yields are the expected forward yield. Let's examine Lowe's (NYS: LOW) and three of its peers.
EPS Payout Ratio
FCF Payout Ratio
The Home Depot (NYS: HD)
Wal-Mart Stores (NYS: WMT)
Tractor Supply (NAS: TSCO)
Source: S&P Capital IQ.
With an interest coverage of 10.3, Lowe's covers every $1 in interest expenses with $10 in operating earnings. Given that its EPS payout ratio and FCF payout ratio are below 35%, you shouldn't have to worry that Lowe's 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 My Watchlist, our free, personalized stock-tracking service.
- Add Lowe's Companiesto My Watchlist.
- Add The Home Depotto My Watchlist.
- Add Wal-Mart Storesto My Watchlist.
- Add Tractor Supply to My Watchlist.
At the time this article was published Follow Dan Dzombak on Twitter at @DanDzombak to check out his musings and see what articles he finds interesting. The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Lowe's Companies, Wal-Mart Stores, and The Home Depot. Motley Fool newsletter services have recommended writing covered calls in Lowe's Companies, as well as creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.
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