Monday, February 13, 2017

9 Higher Yielders With A Low Free Cash Flow Payout

All dividend growth stocks are not created equal. Good companies maintain their dividends during a downturn (like the one we experienced in 2008); while great companies continue to increase their dividends during a downturn. To find these great companies, you will need to focus on more than just yield. You need to consider the stock's Free Cash Flow Payout.

Free Cash Flow is Operating Cash Flow less normal capital expenditures (capital expenditures is usually the first line in the investing section). For a business to remain viable, it must replace capital assets when they wear out. That's why I prefer Free Cash Flow over Operating Cash Flow.

Free Cash Flow tells you how much cash the company has left over after paying the normal operating expenses. This is the cash that is used to pay for acquisitions, debt obligations, and yes, dividends!

The formula for Free Cash Flow Payout is simply the Annual Dividend Per Share divided by Free Cash Flow Per Share. I like to see a percentage of 70% or less. The 70% is somewhat higher than many people look for with a traditional payout ratio. I am comfortable with the higher number since we are talking about real cash generated from running the business vs. accounting earnings that may or may not be there.

This week I screened my database for select stocks with:

- A free cash flow payout below 45%
- A dividend yield over 3%

The results are presented below:

Wal-Mart Stores, Inc. (WMT) is the largest retailer in the world, operating a chain of over 10,000 discount department stores, wholesale clubs, supermarkets and supercenters.
FCF Payout: 29.4% | Yield: 3.0%

IBM's (IBM) global offerings include information technology services, software, computer hardware equipment, fundamental research, and related financing.
FCF Payout: 37.3% | Yield: 3.2%

Meredith Corp. (MDP) publishes a suite of magazines and websites focused on food, parents and women (e.g. Better Homes and Gardens) and operates 17 local TV stations.
FCF Payout: 38.1% | Yield: 3.7%

Southside Bancshares Inc. (SBSI) owns Southside Bank, which primarily provides financial services to individuals, businesses, municipal entities, and non-profit organizations.
FCF Payout: 41.6% | Yield: 2.9%

Cisco Systems, Inc. offers a complete line of routers and switching products that connect and manage communications among local and wide area computer networks employing a variety of protocols.
FCF Payout: 42.7% | Yield: 3.3%

Old Republic Intl (ORI) is an insurance holding company that engages mainly in the general (property and liability), title, and mortgage guaranty and consumer credit indemnity run-off businesses.
FCF Payout: 42.5% | Yield: 3.6%

Target Corp. (TGT) operates nearly 1,800 Target, SuperTarget and CityTarget general merchandise stores across the U.S.
FCF Payout: 40.7% | Yield: 3.8%

Qualcomm Incorporated (QCOM) focuses on developing products and services based on its advanced wireless broadband technology.
FCF Payout: 44.1% | Yield: 4.0%

Westwood Holdings Inc. (WHG) provides investment advisory services to a wide range of institutional clients, and also provides trust and custodial services.
FCF Payout: 44.5% | Yield: 4.5%

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 250+ 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 WMT, IBM, MDP, CSCO, ORI, QCOM, WHG. See a list of all my Dividend Growth Portfolio holdings here.

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