Albemarle's Dividend Is Safe

Dan Dzombak, The Motley Fool
Updated

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 than 80% could be a red flag.

Each of these ratios reflect dividends paid in the trailing 12 months, while yields are the expected forward yield. Let's examine Albemarle (NYS: ALB) and three of its peers.

Company

Yield

Interest Coverage

EPS Payout Ratio

FCF Payout Ratio

Albemarle

1.3%

15.6

13.9%

33.3%

RPM International (NYS: RPM)

3.7%

5.3

55.7%

100.7%

Cytec Industries (NYS: CYT)

1.1%

6.3

9.0%

16.4%

FMC (NYS: FMC)

0.7%

14.5

17.7%

11.0%

Source: S&P Capital IQ.

With an interest coverage of 15.6, Albemarle covers every $1 in interest expenses with $15 in operating earnings. Given that its EPS payout ratio and FCF payout ratio are also solid, at 13.9% and 33.3% respectively, you shouldn't have to worry that Albemarle will need to cut its dividend anytime soon.

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