Walgreen: Dividend Dynamo, or the Next Blowup?

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 Walgreen (NYS: WAG) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.

1. Yield
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.

Walgreen yields 2.8%, a bit higher than the S&P's 2.2%.

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.

Walgreen has a modest payout ratio of 24%.

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 is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

Walgreen has a debt-to-equity ratio of 16% and an interest coverage rate of 53 times.

4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

Let's examine how Walgreen stacks up next to its peers:

Walgreen 11% 22%
CVS Caremark (NYS: CVS) 10% 25%
Rite Aid (NYS: RAD) N/A 0%
Target (NYS: TGT) 8% 20%
Source: S&P Capital IQ.
The Foolish bottom line
Walgreen exhibits a clean dividend bill of health. It has a nice yield, a modest payout ratio, a small debt burden, and decent growth. To stay up-to-speed on Walgreen's progress, add it to your stock watchlist. If you don't have one yet, you can create a free, personalized watchlist of your favorite stocks by clicking here.

At the time this article was published Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. The Motley Fool owns shares of Walgreen Pharmaceutical Industries. Motley Fool newsletter services have recommended buying shares of Walgreen Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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