Traditionally, this is calculated as annual dividend per share divided by earnings per share (EPS). I don't particularly care for this calculation. Due to all the odd accounting rules, EPS is not cash. Instead, I prefer to use a free cash flow payout ratio.
Free cash flow has several different definitions, but the one I use is operating cash flow less capital expenditures, plus proceeds from the sale of PP&E. These amounts are found on the statement of cash flows. Operating cash flow starts with net earnings and adjusts out non-cash items, such as depreciation and amortization, and non-operating items such as land sales.
Since a business can't continue in the long term without capital spending (machinery and equipment, etc.), capital expenditures are subtracted from operating cash flow in calculating free cash flow and the cash proceeds received from the sale of the old equipment is added back. It is important to note that only "normal" capital expenditures are deducted, not acquisitions, and sales of businesses are not added back. The decision to make an acquisition or divestiture is strategic, not operating.
Once calculated, free cash flow is divided by diluted shares to put on a per-share basis. Finally, the annual dividend per share is divided by free cash flow per share to calculate the payout ratio. With the traditional EPS-based payout ratio, many people consider 50% or below good. However, since a lot of the noise has been removed when using free cash flow, I consider a payout ratio of 60% or lower good.
The lower the payout ratio the more cash is available to increase the company's dividend. A low ratio is especially good during an economic downturn, when the amount of cash generated will likely be less.
Here are several stocks with a free cash flow payout ratio less than 30% and a yield greater than 2%:
IBM (IBM)'s global capabilities include include information technology services, software, computer hardware equipment, fundamental research, and related financing.
Payout Ratio: 28.02% | Yield: 2.1%
Aflac (AFL) Incorporated provides supplemental health and life insurance in Japan (80% of earnings) and the U.S. Products are marketed at work sites and help fill gaps in primary coverage.
Payout Ratio: 4.89% | Yield: 2.2%
1St Source Corporation (SRCE) is a bank holding company owns 1st Source Bank and First National Bank, Valparaiso that offer commercial and consumer banking services to clients in Indiana and Michigan.
Payout Ratio: 19.05% | Yield: 2.2%
Weyco Group Inc. (WEYS) distributes, wholesale & retail, men's branded footwear in the U.S., Canada, Europe; offers casual footwear, dress shoes and accessories under Florsheim, other brands.
Payout Ratio: 29.81% | Yield: 2.5%
Owens & Minor Inc. (OMI) is a leading domestic distributor of medical and surgical supplies to the acute care market, a health care supply chain management company, and a direct-to-consumer (DTC) supplier of testing and monitoring supplies for diabetes.
Payout Ratio: 29.66% | Yield: 2.5%
Harris Corporation (HRS) focuses on communications equipment for voice, data and video applications for commercial and governmental customers.
Payout Ratio: 27.96% | Yield: 2.6%
UGI Corp. (UGI) operates propane distribution, gas and electric utility, energy marketing and related businesses through subsidiaries.
Payout Ratio: 29.63% | Yield: 2.7%
Community Trust Bank Corp. (CTBI) owns and operates Community Trust Bank, Inc. of Pikeville, KY, which provides commercial banking services in Kentucky and West Virginia; and a trust company.
Payout Ratio: 25.57% | Yield: 2.9%
Southside Bancshares Inc. (SBSI) owns Southside Bank, which primarily provides financial services to individuals, businesses, municipal entities, and non-profit organizations.
Payout Ratio: 27.34% | Yield: 3.1%
Tompkins Financial (TMP) provides commercial and consumer banking, leasing, trust and investment services, financial planning and other financial services in New York and Pennsylvania.
Payout Ratio: 27.32% | Yield: 3.4%
Erie Indemnity Co. (ERIE) is a management services company that provides sales, underwriting, and policy issuance services tothe policy holders of Erie Insurance Exchange in the United States.
Payout Ratio: 14.23% | Yield: 3.4%
Old Republic Intl (ORI) engages mainly in the general (property and liability), title, and mortgage guaranty and consumer credit indemnity run-off businesses.
Payout Ratio: 27.21% | Yield: 4.2%
The data present above is in its raw form. Some of the the companies would be disqualified for poor dividend fundamentals. However, some of the others may be worth some additional probing.
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 AFL, OMI, CTBI in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.
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