Energy Transfer Partners' 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 Energy Transfer Partners (NYS: ETP) , which yields 7.9%.
Energy Transfer Partners includes pipelines and other midstream operations. The company, like peer Kinder Morgan (NYS: KMP) , has been a steady performer as its operations are largely unaffected by the movements of oil and natural gas prices. The company also has a retail propane operation, similar to Suburban Propane Partners (NYS: SPH) .
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.
With its steady business, Energy Transfer Partners has a steady quarterly dividend of $0.89.
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 one means the company is not bringing in enough money to cover its interest expenses.
Energy Transfer Partners covers every $1 in interest expense with more than $7 in operating earnings.
The other tools we use to evaluate the safety of a dividend 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.
Energy Transfer Partners' payout ratio has been steadily rising as its issued shares expand while its dividend stays the same.
Source: S&P Capital IQ.
There are some alternatives in the industry. Farrellgas Partners (NYS: FGP) has a yield of 10.3% but a negative payout ratio. Linn Energy (NAS: LINE) has a yield of 7.4% and a payout ratio of 118%. Enterprise Products Partners (NYS: EPD) rounds out the group with a yield of 5.5%.
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At the time this article was published Follow Dan Dzombak on Twitter at @DanDzombak to check out his musings and see what articles he finds interesting. Motley Fool newsletter services have recommended buying shares of Enterprise Products Partners. 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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