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Do you know the only thing that gives me pleasure? It's to see my dividends coming in. ~ John D. Rockefeller

When researching companies, I never purposely go out of my way to find strong dividend plays and concentrate on finding companies with strong results in Price to Free Cash Flow and FROIC = Free Cash Flow to Invested Capital. But every once in a while, I find companies that are not only free cash flow powerhouses, but also pay rather nice dividends.

This I consider to be a bonus, especially when I can find long-established companies with excellent management at the helm. Nice dividend paying stocks are hard to find these days. What I define as “Nice” are companies that have very strong free cash flow and FROIC but also possess superior quality management, who are both able to sustain excellent levels of growth as well as easily pay out very attractive dividend yields to shareholders.

For those who don’t know, here is the definition of FROIC.

FROIC = FCF per share/ (long term debt per share + shareholders equity per share)

FROIC basically tells you how much return in free cash flow a company generates for every dollar of Total Capital they employ.

I consider FROIC the primary determining factor in identifying growth companies as you can compare every company (except financials) on an equal basis. The question I ask every company I analyze is = how much return (in percent) in FCF are you going to give me for every dollar of total capital you invest?

In my research, I have been able to find three companies that fit the scenario that I have outlined above.

The three companies are;

1) Hillenbrand (HI)

Stock Price = $19.68

Dividend = $ .74

Free Cash Flow per Diluted Share = $1.82

Total Capital per share = $4.09

FROIC = 45%

Price to Free Cash Flow = 10.81

Dividend Yield = 3.76%

Free Cash Flow Payout Ratio = 40%

Free Cash Flow Reinvestment Ratio = 60%

2) Lockheed Martin (LMT)

Stock Price = $ 76.78

Dividend = $ 2.52

Free Cash Flow per Diluted Share = $10.02

Total Capital per share = $58.53

FROIC = 17.11%

Price to Free Cash Flow = 7.66

Dividend Yield = 3.28%

Free Cash Flow Payout Ratio = 25%

Free Cash Flow Reinvestment Ratio = 75%

3) Suburban Propane (SPH)

Stock Price = $ 45.58

Dividend = $ 3.32

Free Cash Flow per Diluted Share = $6.81

Total Capital per share = $10.09

FROIC = 67%

Price to Free Cash Flow = 6.69

Dividend Yield = 7.28%

Free Cash Flow Payout Ratio = 49%

Free Cash Flow Reinvestment Ratio = 51%

(Data Sources = Morningstar & Yahoo Finance)

As you can see, these are very impressive results. I have already written an article on Suburban Propane for Seeking Alpha, so you can read my analysis of it here.

Hillenbrand is a Funeral Home supplier; it sells everything that is related to that business and is the most established supplier in the field. What makes them different from their competition and makes them a favorite of Funeral Directors is that they have a unique “Just in Time” delivery system. Not to get morbid here, but when a person passes on to the next world, the Funeral Director who uses Hillenbrand as a supplier makes a phone call and Hillenbrand sends out the casket of their choice immediately to their location.

By offering this service, the Funeral Director does not have to keep any inventory in stock. It may seem weird when you first think about “Just in time caskets,” but on second thought, it is rather a brilliant idea and shows how Hillenbrand is at the cutting edge in (pardon the pun) a dead business. With the baby boomers hitting the senior circuit, I see this as a very long-term play as everyone eventually has to use their service.

Lockheed Martin is a unique player in the defense industry, as over the next couple of decades, they will be the sole supplier of the next generation fighter, the F-35.


The Pentagon decided that they wanted just one main fighter for all branches of the military, and they selected Lockheed Martin to build it. The plane, which is almost ready to go into production, will serve our armed forces for the next 20 years+ as well as be sold to other countries. It is the most advanced fighter jet in the world, and orders for the plane over its life are estimated at $300 Billion. When you do the math, that comes out to $731 a share in revenues that LMT will receive over the next couple of decades from just this one plane.

In conclusion, we have presented everyone with three unique strong free cash flow dividend plays that each have very unique business models, which also possess a special “niche” factor or “moat” as Warren Buffett likes to call it. There are more companies like these three that I have found, but none have the nice dividend yields that these three possess.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice.

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

Author's Disclosure: Long SPH,HI,LMT

Source: 3 Free Cash Flow Dividend Stocks