3M's Dividend Is Safe
Dividend investors know that it pays to follow how much of a company's money goes toward funding its payouts. 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 percentage of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.
Each of these ratios reflect dividends paid in the trailing 12 months; yields are the expected forward yield. Let's examine 3M (NYS: MMM) and three of its peers.
EPS Payout Ratio
FCF Payout Ratio
|General Electric (NYS: GE)||3.7%||14.0||44.3%||NA|
|Emerson Electric (NYS: EMR)||2.9%||15.9||42.3%||49.6%|
|Ingersoll-Rand (NYS: IR)||1.6%||5.4||42.2%||NA|
Source: S&P Capital IQ.
3M covers every $1 in interest expenses with $32 in operating earnings. Given that its EPS payout ratio and FCF payout ratio are below 50%, you shouldn't have to worry that 3M 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 3M to My Watchlist.
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At the time this article was published FollowDan Dzombakon Twitter at@DanDzombakto check out his musings and see what articles he finds interesting.Motley Fool newsletter serviceshave recommended buying shares of 3M and Emerson Electric and creating a diagonal call position in 3M. 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.