Dividends can be a very important part of an investor's total return over time. From 1930 to 2012, dividends accounted for 42% of the stock market's gains. This is hard to ignore for any long-term investor. In addition to contributing to long-term gains, dividends can provide investors with some cushion to the downside, and can even create a price floor for certain stocks.
Many investors use their dividend payouts to help cover their expenses in retirement, and search for companies who increase their dividend payouts every year to protect their income streams from inflation and increases in the cost of living. They will often diversify into many different sectors of the economy in order to spread out their risks.
Today, let's delve into the consumer goods sector with a look at the dividends from Tupperware Brands Corporation (NYSE:TUP). In this analysis, we will see how this company's dividend stacks up in terms of strength, sustainability, and potential for growth going forward.
The dividend yield is usually one of the first things that dividend investors look at during their research. It represents the percentage of capital that the investor can expect to receive back over the course of the next 12 months if he or she buys today.
Tupperware Brands currently sports a dividend yield of 3.3%. Note that this is a forward yield that reflects the company's recent increase in its quarterly dividend from 62 cents per share to 68 cents. This puts the yield of Tupperware Brands at its highest level since July 2009.
While a high starting dividend yield can be great, we need to make sure that the company in question can increase that dividend over time, helping us protect our income streams against inflation. Dividend growth can also be used as a signal from management that they are confident in the company's prospects.
Table 1: Dividend Growth Rates Of Tupperware Brands
Table 1 shows how management at Tupperware Brands has increased the company's dividend over the last five years. 2013 really jumps out, as the company increased its dividend payout by 72% during this time. This huge increase was due to a change in the company's dividend policy, which included an increase in the target payout ratio from 33% to 50% of trailing non-GAAP earnings to reflect management's growing confidence in the company's future results.
Tupperware Brands has increased its quarterly dividend five years in a row, after holding it steady at 22 cents per share from 1996 to 2009.
Free Cash Flow Payout Ratio
While a high dividend yield and strong dividend growth are great, we need to make sure that the company can keep making enough money to support the dividend going forward. This is where the free cash flow payout ratio comes in. This ratio shows us the percentage of free cash flow that is being eaten up by dividend payments.
Table 2: Free Cash Flow Payout Ratios From Tupperware Brands
Table 2 shows that the dividends from Tupperware Brands are not in any danger at all right now. It also shows that the company's dividend growth has outpaced its growth in free cash flow. However, this is consistent with the company increasing its target payout ratio to 50% of trailing non-GAAP earnings per share.
Interest Coverage Ratio
When determining the safety of a company's dividend, it is also wise to see whether the company's debt might have an impact on the dividend going forward. After all, more money spent on interest payments means less money that is available for dividend payments. This is where the interest coverage ratio comes in. It shows how many times the company's operating earnings covered its interest obligations over the past 12 months. It is calculated by dividing the company's earnings before interest and taxes (EBIT) by the company's interest expense. If the ratio comes in below 2, then the company's debt may be a cause for concern with regard to the dividend.
Fortunately, this is not a problem at all for Tupperware Brands, a company that covered its interest expense 10 times over the last 12 months. Right now, debt is not having an effect on the dividends from Tupperware Brands.
Earnings Per Share Growth Forecasts
While it's important to look at the relationship between past dividend payouts and past earnings, we need to get an idea as to what kind of earnings we can expect from the company going forward. This is especially important in cases like Tupperware Brands, who targets its dividend payout as a percentage of trailing earnings. To get an idea of what to expect, we look at analyst estimates for the next couple of years.
This year, Tupperware Brands is expected to earn $5.63 per share, which is good for 3.7% earnings per share growth. Next year, the company is expected to earn $6.28 per share, which equates to 11.5% earnings per share growth. With trailing 12-month per-share earnings of $5.43, the company's $2.72 per share annual dividend payout for this year represents the targeted 50% of its trailing non-GAAP earnings per share. With this in mind, we should expect dividend growth going forward to be in line with earnings per share growth. Please note that these earnings per share figures are on a non-GAAP basis.
Tupperware Brands currently offers a very attractive dividend yield that is at its highest level in nearly five years. The company has exhibited strong dividend growth due to a combination of earnings growth and a change in the company's dividend policy that calls for a higher payout ratio. With a free cash flow payout ratio of under 50%, the current dividend is not in any danger at this time, nor is debt a factor.
However, with a forward payout ratio already at the management-targeted 50% of earnings per share and low single-digit earnings per share growth expected for this year, I would expect the same level of dividend growth for the next year, unless management agrees to temporarily expand its payout ratio. With that said, if the earnings forecasts for 2015 hold true, then we should see double-digit dividend increases once again.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.