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 see how that's changed over the past five years.
The company we're looking at today is Celanese (NYS: CE) , which yields 0.5%.
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.
Celanese's dividend was stead at $0.04 per quarter before it began rising in 2010. In two years, the dividend was raised twice, to where it now sits at $0.06 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.
At 3.13, for every $1 in interest expense Celanese earns $3 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.
Source: S&P Capital IQ.
Celanese's earnings payout ratio jumped with the financial crisis, but otherwise it has been steady in the single digits.
Another tool for better investing
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