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Eleven Companies That Could
Boost Their Dividends |
Published:
May 25,
2007
Forget earnings. If you really want to see if a company's dividend is
secure, then you need to evaluate the real bottom line -- free cash flow
(FCF).
In many ways, reported earnings are simply an accounting fiction. They
can be reported in different ways, depending on how a company tells its
story and who it's talking to. By contrast, free cash flow represents
real money. It's the hard cash the company puts in its pocket after
paying its bills and investing in the business. Management can use free
cash flow to pay down debt, buy back shares, or do what's most important
to income investors -- pay us our dividends.
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Some companies make it easy for you to find this all-important
number. Rural telecom Citizens Communications (NYSE: CZN), for instance,
reported in its latest earnings release that free cash flow rose +2%
last year to reach $540 million.
Most companies aren't quite so upfront about this number, but you can
still quickly calculate a ballpark figure by looking at data found on
the Statement of Cash Flows. Simply put, free cash flow is cash flow
from operations (or operating cash flow) less capital expenditures.
In order to calculate this figure, you first need to determine a firm's
cash flow from operations. This is usually listed as "Net cash provided
by operating activities," which can be found on the top half of a firm's
Statement of Cash Flows. The Consolidated Statement of Cash Flows given
on page 65 of Citizens' 2006
annual report shows that the company
delivered operating cash flows of $829 million last year.
A few lines down, you'll find an item called "capital expenditures." The
company invested $269 million last year in acquisitions or other major
projects needed to grow the business. Subtracting these expenditures
from the company's operating cash flow will give you a rough idea of its
free cash flow.
For example, the resulting figure of $560 million ($829 million less
$269 million) for Citizens is slightly off, because you would need to
adjust for things like stock-based compensation payments -- but it's
close enough.
From here, you only need one more number to get a pulse on the safety of
your dividend payment. On the lower half of the page, management tells
you precisely how they spent the cash flow -- to pay down debt, buy back
shares, and dish out dividends. The last item on the section below shows
that the company paid out about $324 million in dividends last year.
With this information in hand, you can easily calculate the payout ratio
-- or dividend payments as a percentage of free cash flow. Simply divide
$324 million in dividends paid by $540 million in free cash flow, and
you'll see that the company has a cash flow payout ratio of 60%. That
means it paid shareholders just over half of its cash, so it generated
more than ample cash to cover these payments.
Notice we used the past tense -- the company's payout ratio was 60% of
last year's cash flow. To really get a handle on how secure your
dividend will be in the years ahead, you would need to know what the
free cash flow and dividend payouts will look like going forward.
Projections on these items can be very iffy, and they're seldom
available to the public.
Instead, you can look at past financial statements to get a feel for the
company's ability to build free cash flow and cover its dividend
payments. Past performance can't guarantee future results, but it does
give you an idea of what you can expect going forward.
Of course, that takes a lot of work. Fortunately, we've already done
most of the heavy lifting for you -- combing through dozens of financial
statements to find companies that not only generated growing free cash
flow over the past three years, but that also paid out less than 100% of
last year's total. The combination of these two factors increases the
likelihood that a firm will maintain (or even raise) its dividend
payments going forward.
To make the grade, we also required that these cash cows offer a hefty
dividend yield of 5% or better.
Please use the list below as a starting point for more research, as some
of these companies may make better investments than others. Yes, they
have all generated growing free cash flows and offer sizeable dividends.
And based on their payout ratios, they still have additional cash to
spare. That bodes well for the future, but keep in mind that future
growth strategies and the overall economic environment could
significantly impact both share prices and dividend payouts for these
companies going forward.
Important Note: Throughout the remainder of this article, Editor Carla
Pasternak and our research staff provide the names of 11 securities that
meet the requirements above. However, in order to view the remainder of
this article, you'll need to subscribe to our premium newsletter --
High-Yield Investing. After you subscribe you'll receive immediate
access to this full article, as well as our monthly High-Yield Investing
newsletter and a host of additional premium content. Please visit one of
the following links to continue...
Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Investing. |
Carla
Pasternak draws on a variety of financial backgrounds to make profitable
calls on income-generating stocks for her readers.
Carla has
been employed in the investment industry for more than two decades. In
addition to her work as a writer for several other nationally recognized
financial publishers, her previous experience includes a position as
President of a well-respected investor relations firm. She has also been
writing shareholder reports for public companies (annual reports,
speeches, corporate profiles, slide shows, etc.) since 1980.
A highly
successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select
companies that not only pay rich dividends, but that also have the
potential to deliver strong long-term capital gains.
On the
educational front, Carla holds both MBA and Ph.D. degrees. When she's
not watching the market, she's teaching business courses at the college
level and managing several million dollars in portfolio assets.
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