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 Whirlpool (NYS: WHR) , which yields 3.7%.
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.
Whirlpool's dividend had been steady at $0.43 per quarter since 2004 until it was rasied in 2011 to $0.50 per quarter.
To understand how safe a dividend is, we use two 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.
Whirlpool covers every $1 in interest expense with more than $3 in operating earnings.
The other tool we use to evaluate the safety of a dividend is:
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.
Source: S&P Capital IQ.
Whirlpool's payout ratio has historically been low. With the raise in dividend, it jumped to nearly 50% but has since come back down to around 40%, a very low level.
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