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What Should We Make Of The Dividends At Tupperware Brands?

April 12, 2014

If you're looking to buy a partial ownership stake in a publicly-traded company, then there are a number of things that you should consider before doing so. These things include the company's business model, historical earnings growth and corporate governance. Another thing that you may want to consider is the dividend.

Dividends are very important as they can provide some cushion for investors to the downside and can also signal confidence from management in the company's future. Many investors pursue dividend-paying stocks to augment their returns with a nice income stream. Most of them prefer to diversify into many different sectors of the economy in order to spread out their risk.

Today, let's take a look at Tupperware Brands, a player in the consumer goods sector of the economy. Let's see how the dividend of Tupperware Brands stacks up in terms of strength and sustainability and what investors can expect going forward.

Dividend Yield

The first and most obvious consideration when evaluating a company's dividend is the dividend yield, which represents the percentage of your investment that you'll receive back over the next 12 months at current share prices and dividend payouts.

Tupperware Brands currently yields 3.3%, the company's highest dividend yield since July 2009. Its current yield is actually a forward yield that is based on the company's recent payout of 68 cents per share.

Dividend Growth

When analyzing a dividend, it's not all about the yield. As an income investor, you want that dividend to grow over time in order to protect your income stream from the erosive effects of inflation as well as to show confidence from management in the company's outlook.

2014 2013 2012 2011 2010
10% 72% 20% 20% 14%

Table 1: Dividend Growth Rates from Tupperware Brands

Table 1 shows strong dividend increases over the last several years from Tupperware Brands. What really jumps out is the 72% increase that was seen in 2013. This huge increase was driven in part by the company's decision to increase its target payout ratio from 33% to 50% of non-GAAP earnings per share. This company has increased its dividend now for five years in a row, after holding it steady from 1996 to 2009.

 

Free Cash Flow Payout Ratio

While high dividend yields and strong dividend growth are nice, we need to make sure that the company in question can generate enough cash flow to cover its dividend payment. The free cash flow payout ratio tells us what percentage of the company's free cash flow is eaten up by dividend payments. Lower free cash flow payout ratios are better as they leave more room available for future dividend increases or other uses of the capital.

Free cash flow is the cash flow a company generates in its operations minus capital expenditures.

2013 2012 2011 2010
46% 35% 37% 26%

Table 2: Free Cash Flow Payout Ratios of Tupperware Brands

Table 2 shows that the dividends of Tupperware Brands are not in any sort of danger at this point in time, as they currently consume less than half of free cash flow. The table also shows that the company's dividends have grown faster than free cash flows. However, this is consistent with the company increasing its payout ratio.

From looking at the company's free cash flow payout ratio, it can be concluded that the dividend is in no danger at this point in time.

Interest Coverage Ratio

One of the ways in which we can determine whether or not a company will have trouble paying its dividend in the future is by looking at how much interest it has to pay every year. More money spent on interest means less money that is left for dividends. To determine the effect that debt has on a company's ability to pay its dividends and fund other activities, I calculate the interest coverage ratio. This ratio is calculated by dividing the company's earnings before interest and taxes by its interest payments over the year. You generally like to see this ratio at or above 2. If it's below this figure, then that may signal trouble ahead for the company in question.

Fortunately, this is not a problem at all for Tupperware Brands. Its earnings before interest and taxes over the past 12 months covered its interest obligations 10 times. At this point, debt is not having an effect on the company's ability to pay its dividends.

Earnings Per Share Growth Forecasts

While it's good to look at what past dividend payouts have been and how they relate to past earnings, we need to get an idea as to what future dividend payouts are going to look like. One of the ways in which we do this is by looking at analyst forecasts for earnings-per-share growth. This year, analysts expect Tupperware Brands to increase its earnings per share by 3.7%, followed by an 11.5% increase in 2015. It should be mentioned that these projections are based on non-GAAP earnings.

Conclusion

The stock of Tupperware Brands currently has a very attractive dividend yield that is at its highest level in nearly five years. Over the last five years, the company has shown strong dividend growth through a combination of earnings per share growth and an expansion in its payout ratio. Future dividend growth can be supported through expected earnings per share growth and the current low payout ratio. However, given that the company has a target payout ratio of 50% of trailing earnings and that its current payout is already at that level, dividend growth will have to match earnings per share growth going forward. Based on analyst estimates for earnings per share growth, we should expect the next dividend increase to be in the low to mid single-digit range, with the potential for double-digit dividend growth to resume in the years that follow.

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WallStreetBeerMoney.com

"Do Your Own Due Diligence, But By God, Don't Drink Away Your Equity!"

dave@wallstreetbeermoney.com