Walter Energy's Dividend X-ray
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 Walter Energy (NYS: WLT) , which yields 0.7%.
Walter Energy is a producer of met coal for the steel industry. The company -- along with competitors Patriot Coal (NYS: PCX) and Alpha Natural Resources (NYS: ANR) -- have been hurt as customers have slowed down orders of coal. Walter's stock price has jumped around lately as some U.K. newspapers have speculated that BHP Billiton (NYS: BHP) was considering acquiring the company.
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 has it grown.
Walter Energy's dividend has sharply and steadily risen since 2008, and is now $0.13 per quarter.
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.
At 8.41, Walter Energy covers every $1 in interest expense with more than $8 in operating earnings.
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.
Walter Energy's payout ratio has been consistently below 20%.
Source: S&P Capital IQ.
With a low yield, there are alternatives in the industry. Alliance Resource Partners (NAS: ARLP) has a 5.3% yield and nearly a 50% payout ratio. Arch Coal (NYS: ACI) has a yield nearly four times higher than Walter Energy's at 2.8% and a payout ratio of just double. Cliffs Natural Resources (NYS: CLF) rounds out the group with a dividend yield of 1.6% and a payout ratio of just 6%.
Another tool for better investing
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