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 Huntsman (NYS: HUN) , which yields 4.1%.
Huntsman is a chemical company that, like competitors Dow Chemical (NYS: DOW) and Dupont (NYS: DD) , has been benefiting from the rising price for titanium dioxide. The past five years the company flirted with disaster after getting hit hard by the recession and a failed buyout from private equity firm Apollo.
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.
Huntsman has consistently paid a dividend of $0.10 per quarter for the past five years.
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.
Huntsman covers every $1 in interest expense with nearly $3 in operating earnings.
The 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.
Huntsman's payout ratios have been all over the place, as has its business.
Source: S&P Capital IQ.
There are some alternatives in the industry, though none with as high of a yield. Coming closest is Kronos Worldwide (NYS: KRO) , with a 3.4% trailing yield and a 23% earnings payout ratio. Next up is Eastman Chemical (NYS: EMN) , with an 2.8% trailing yield and 22% payout ratio. Last but not least is Sherwin-Williams (NYS: SHW) , with a 1.7% trailing yield and a 31% payout ratio.
Another tool for better investing
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