AMETEK's Dividend X-Ray

Dan Dzombak, The Motley Fool
Updated

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 AMETEK (NYS: AME) , which yields 0.5%.

Dividend
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.


AME Dividend Chart
AME Dividend Chart

AME Dividend data by YCharts

In 2010, AMETEK raised its dividend 50% to where it sits today at $0.06 per quarter.

Immediate safety
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.

AME Times Interest Earned TTM Chart
AME Times Interest Earned TTM Chart

AME Times Interest Earned TTM data by YCharts

At 8.8 AMETEK covers every $1 in operating expense with almost $9 in operating earnings.

Sustainability
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.

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Source: S&P Capital IQ.

AMETEK's payout ratios are exceptionally low at nearly 10%, AMETEK has ample room to continue raising its dividend in the future.

Another tool for better investing
Most investors don't keep tabs on their companies. That's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. We can help you keep tabs on your companies with My Watchlist, our free, personalized stock-tracking service.

For more dividend stock ideas, get The Motley Fool's free report, "9 Rock-Solid Dividend Stocks."

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