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.

Company

Yield

Interest Coverage

EPS Payout Ratio

FCF Payout Ratio

3M2.9%32.037.1%50.9%
General Electric (NYS: GE) 3.7%14.044.3%NA
Emerson Electric (NYS: EMR) 2.9%15.942.3%49.6%
Ingersoll-Rand (NYS: IR) 1.6%5.442.2%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.

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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.

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