Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.
Let's examine how Cooper Tire (NYS: CTB) stacks up. In this series, we consider four critical factors investors should examine in every dividend stock. We'll then tie it all together to look at whether Cooper Tire is a dividend dynamo or a disaster in the making.
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.
Cooper Tire yields 2.7%, a bit higher than the S&P 500's 2.1%.
2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.
Cooper Tire has a modest payout ratio of only 31%.
3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than 5 times is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
Let's see how Cooper Tire stacks up next to its peers:
Goodyear Tire (NYS: GT)
American Axle (NYS: AXL)
Group 1 Automotive (NYS: GPI)
Source: S&P Capital IQ. *Negative equity.
Cooper Tire appears to have a significantly lower debt burden than its peers.
A large dividend is nice; a large, growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
The financial crisis was brutal for the auto and auto parts industries. Five years ago, not a single one of the companies listed above (except for Group 1) were profitable. Today, all four are profitable, with American Axle sporting superior operating margins and Cooper Tire and Goodyear sporting middling margins.
The Foolish bottom line
Cooper Tire's yield may be a bit too low and its earnings history a bit too checkered to consider it a "dividend dynamo," but the company exhibits a reasonable dividend bill of health. It has a moderate yield, a modest payout ratio, and manageable debt. If you're looking for other great dividend stocks, I suggest you check out "Secure Your Future With 11 Rock-Solid Dividend Stocks," a special report from the Motley Fool about some serious dividend dynamos. I invite you to grab a free copy to discover everything you need to know about these 11 generous dividend-payers -- simply click here.
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter@TMFDada. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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