Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a given company to understand the quality of its dividend and how that's changed over the past five years.
The company we're looking at today is Silvercorp Metals (NYS: SVM) , which yields 1.3%.
Silvercorp Metals -- like competitors First Majestic Silver (NYS: AG) and Endeavour Silver (NYS: EXK) -- is a miner of silver, profiting from the silver the company is able to get out of its mines. The company got rocked earlier this year by short-sellers and has had its share of doubters, though Motley Fool writers still believe in the company. While miners certainly require a high level of due diligence, as Motley Fool contributor Christopher Barker did this summer with a tour of Endeavour Silver, all of these businesses should do very well as the price of silver rises.
To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years, and, if so, how much it has grown.
Silvercorp Metals has paid out $0.02 since it first initiated a quarterly dividend policy, and recently increased its quarterly dividend to $0.025.
To understand how safe a dividend is, we use three crucial tools, the first of which is:
The interest coverage ratio, or the number of times interest is earned, which is calculated by 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. A ratio less than 1.5 is questionable; a number less than 1 means the company is not bringing in enough money to cover its interest expenses.
Silvercorp Metals has no debt and as such has no interest to cover.
The other tools we use to evaluate how safe a dividend is are:
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.
Source: S&P Capital IQ.
Except during 2009, Silvercorp Metals has kept a very low payout ratio.
Source: S&P Capital IQ.
With a low yield, there are some alternatives out there in the industry. In the silver sector, Newmont Mining (NYS: NEM) has a larger yield than Silvercorp at 2.1% but also a higher payout ratio. Silver streamer Silver Wheaton (NYS: SLW) is another option, with a yield slightly less than Silvercorp at 1.1% and a payout ratio of just 7.3%. Hecla Mining (NYS: HL) rounds out the sector, with a yield similar to Silvercorp's but with negative free cash flow.
Another tool for better investing
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At the time thisarticle was published Follow Dan Dzombak on Twitter at @DanDzombak to check out his musings and see what articles he finds interesting. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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