Ultimately, cash flow is what drives the value of any financial asset. The reason analysts look at revenue, EPS, EBIT, EBITDA and margins, they are trying to estimate the level of cash the company will generate in the future.
Dividends in Downturns
Dividends are not paid with sales, earnings, EPS, EBIT or EBITDA. Instead dividends are paid with cash. As an investor, you want to pay close attention to the cash flow statement. Unfortunately, it is probably the least used and most misunderstood statement.
Ultimately, cash flow is what drives the value of any financial asset. The reason analysts look at revenue, EPS, EBIT, EBITDA and margins, they are trying to estimate the level of cash the company will generate in the future. When a company consistently generates more cash than it uses, it is able to increase dividends paid, buy back shares, reduce debt, or acquire other companies. However, as we learned in the 2008 to 2009 economic downturn, businesses sometimes go through lean times.
When the economy slows, investors in dividend growth stocks not only expect their dividends to continue, but they also expect them to continue to grow. Some companies do it with debt or by issuing shares.
However, some really fortunate companies are able to access the cash from an unusual place... directly from their balance sheet.
Cash to Dividend CoverageRecently, I added Dividend Cash Coverage to my D4L-Data database. Keep in mind the cash coverage is based on total cash, not just domestic (U.S.) cash. Foreign cash is generally not available to pay U.S. dividends without the corporation having to pay taxes on the cash.
This week week, I screened my dividend growth stocks database for 4 and 5-Star companies with a debt to total capital less than 40, free cash payout less than 60%, yield above 3.0% and a dividend cash coverage greater than two times. The results are presented below:
Intel Corporation (INTC) is the world's largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products. The company has paid a cash dividend to shareholders every year since 1992 and has increased its dividend payments for nine consecutive years. INTC is a member of the S&P 500.
Yield: 4.3% | Coverage: 2.4 Times
General Dynamics (GD) is the world's fifth largest military contractor and also one of the world's biggest makers of corporate jets. The company has paid a cash dividend to shareholders every year since 1979 and has increased its dividend payments for 21 consecutive years. GD is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index.
Yield: 3.1% | Coverage: 3.5 Times
AbbVie Inc. (ABBV), a research-based pharmaceuticals company, engages in the discovery, development, manufacture, and sale of a line of pharmaceuticals and biologics worldwide. The company (its predecessor company ABT) has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 40 consecutive years.
Yield: 4.4% | Coverage: 4.6 Times
Raytheon Company (RTN), the world's sixth largest military contractor, specializes in making high-tech missiles, advanced radar systems and sensors, defense electronics, and missile-defense systems. The company has paid a cash dividend to shareholders every year since 1964 and has increased its dividend payments for eight consecutive years. RTN is a member of the S&P 500.
Yield: 3.7% | Coverage: 5.5 Times
Microsoft (MSFT), the world's largest software company, develops PC software, including the Windows operating system and the Office application suite. The company has paid a cash dividend to shareholders every year since 2003 and has increased its dividend payments for 10 consecutive years. MSFT is a member of the S&P 500.
Yield: 3.3% | Coverage: 8.6 Times
As an investor in dividend growth stocks, I want to know my company is financially capable of paying me a higher dividend each year, and the cash flow statement is the first place to look when making this determination. Cash on the balance sheet is like an insurance policy for the times when the business or the economy sputters.
Full Disclosure: Long INTC, GD, ABBV, RTN, MSFT. See a list of all my dividend growth holdings here.
- 11 Low-Debt, Higher-Yielding Dividend Stocks
- 7 Small-Cap, High-Yield Dividend Stocks
- 10 High-Energy, High-Yield Dividend Stocks
- 12 Dividend Stocks For A Powerful Income Stream
- 7 Dividend Stocks Sporting A Five-Star Rating
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