|New Threads Only:|
|New Threads & Replies:|
Forum List » Income Investors' Forum|
Ideas for Income Investors. High Dividend Stocks, Mutual Funds etc.
5 Dividend Stocks Building a Growing Cash Stream
Posted by: Dividends4Life (IP Logged)
Date: August 21, 2013 01:21PM
Are you looking for companies that can sustain and grow their dividend? In making that determination, a company's statement of earnings is one of the last places you should look. Cash is king for the dividend investor and the Statement of Cash Flows is where astute investors begin when they want to understand the viability of a company.
It's not that most companies have done anything wrong when preparing their statement of earnings, but under generally accepted accounting principles (GAAP) a lot of the entries have nothing to do with today's operations. Given this, I generally avoid most earnings related metrics (e.g. EBIT, EBITDA, payout ratio, etc.).
The cash flow statement is not based on accrual accounting, but instead is a cash-basis report focusing on inflows and outflows of cash. It adjusts for transactions that do not directly affect cash receipts and payments, such as adding depreciation back to net earnings. The cash flow statement allows investors to understand how a company's operations are running, where the cash is coming from and how it is being spent.
As an investor in dividend growth stocks, I want to know if a company is financially capable of paying me a higher dividend each year. That's why I focus on cash-based metrics such as these:
Free Cash Flow
This has many definitions, but the one I use is operating cash flow less capital expenditures. Capital expenditures are deducted since you can't run a business for any period of time without expending some level of capital. These two numbers are easily located on the Statement of Cash Flows. This is the best snapshot of what cash the business has generated from "normal" operations and is available for dividends, debt, acquisitions and purchases of treasury stock.
Cash Flow Per Diluted Share
GAAP Earnings Per Share (EPS) has the same short-comings as GAAP earnings. When looking at per numbers I prefer a cash-based number. Cash Flow Per Diluted Share is calculated by taking the Free Cash Flow from above and dividing it by diluted shares outstanding (available on the Statement of Earnings).
Cash Payout Ratio
Dividend investors love payout ratios (dividends per share divided by EPS). Given my concerns with GAAP earnings and EPS, I once again prefer a cash-based version. The Cash Payout Ratio is calculated by dividing dividends per share by Cash Flow Per Diluted Share. Care should be taken when interpreting this ratio. For example, sometimes a high ratio with low debt is better than a low ratio with high debt.
Cash Return on Capital Employed
This is simply free cash flow divided by total capital (debt + equity). Again, I prefer using a cash number in the numerator. A lot of investors look at return on assets and return on equity. Each are flawed beyond their GAAP numerator. Return on assets ignores the liabilities side of the balance sheet, while return on equity ignores the debt component of capital.
You can fake earnings, but you can't fake cash.
This week, I screened my dividend growth stocks database for select non-financial dividend stocks that have a free cash flow payout of 50% or less with a yield of 3.0% or more. The results are presented below:
Sonoco Products Co. (SON) makes of paper and plastic packaging products serves various industries and markets in more than 85 countries.
Yield: 3.2% | FCF Payout: 43.09%
Meredith Corp. (MDP) publishes a suite of magazines and websites focused on food, parents and women (Better Homes and Gardens) and operates 12 local TV stations.
Yield: 3.4% | FCF Payout: 43.64%
Hasbro Inc. (HAS) holds a broad portfolio of toys, games and entertainment offerings including brands such as Transformers, Playskool, Monopoly and My Little Pony.
Yield: 3.5% | FCF Payout: 46.37%
Verizon Communications Inc. (VZ) is the largest U.S. wireless carrier, Verizon also offers wireline and broadband services primarily in the northeastern U.S.
Yield: 4.2% | FCF Payout: 46.21%
AT&T Inc. (T) provides telephone and broadband service and holds full ownership of AT&T Mobility (formerly Cingular Wireless).
Yield: 5.2% | FCF Payout: 49.31%
As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor business fundamentals. However some of the others may be worth additional due diligence.
My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 230+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have had a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.
Full Disclosure: Long T in my Dividend Growth Portfolio and long MDP, VZ in my High-Yield Portfolio. No position in the aforementioned securities. See a list of all my dividend growth holdings here.
- A Winning Investment Strategy
- 8 Industrial Strength Stocks With Dividend Growth
- 6 Dividend Stocks To Beat The Wall Street Giants
- First Quarter 2013: Top And Bottom Performing Dividend Stocks
- A Disciplined Approach To Dividend Stocks
Stocks Discussed: SON, MDP, HAS, VZ, T,
Disclaimers: GuruFocus.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on GuruFocus.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The gurus may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall GuruFocus.com be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on GuruFocus.com, or relating to the use of, or inability to use, GuruFocus.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. The gurus listed in this website are not affiliated with GuruFocus.com, LLC. Stock quotes provided by InterActive Data. Fundamental company data provided by Morningstar, updated daily.