Income Investors: 5 Cash Flow Kings

by: Vatalyst

Earnings are an accountant's opinion and can be fudged, but cash is a fact. A company's ability to sustain (let alone grow) its dividend is dependent first and foremost upon cash flow. The longer the company's dividend payout history - the healthier its cash flow - the more it is likely to reward investors with income that may generate healthy dividend checks, supplement downturns in the stock price and/or add to long-term total return. Even the most growth-oriented investors can benefit from owning dividend-paying stocks and these days there are many to choose from. The problem is to find the right stocks and to avoid paying too much for them.

McDonald's Corporation (NYSE:MCD) shareholders are anticipating another quarter of tasty profits, reflecting a combination of product innovation and international expansion. The stock closed recently just above $101 a share, near it's intra-day high and close to the peak of its 52-week range ($72.89-$101.59). Based on its closing price and dividends of $2.80 a share during the past 12 months, the stock's current yield is about 2.5% and it has been able to raise its dividend every year since 1976. McDonald's earnings per share for the past 12 months were $5.10, reflecting its expanding menu items, store expansion and continuing penetration into multiple geographical regions. McDonald's is planning to continue to expand in Europe and Asia, and it may benefit from its planned sponsorship of the Olympic games through 2020. A member of the bellwether S&P 500 stocks, McDonald's rose more than 35% last year, compared with U.S.-centered Wendy's (NYSE:WEN), for example, which rose 2% and has a much lower yield. It also out-shown such competitors as Yum! Brands (NYSE:YUM) and Starbucks Corp. (NASDAQ:SBUX). On the downside, at a time when most stocks are selling at bargain prices, McDonald's stock is not cheap. Its price earnings ratio is 19.94 currently. But for conservative investors looking for a long-term idea, consider stepping up to the window to place an order. Operating cash flow stands at $7.1 billion.

Altria Group, Inc. (NYSE:MO) is a holding company whose principal subsidiaries are cigarette maker Philip Morris USA Inc. (NYSE:PM) and leasing subsidiary Philip Morris Capital Corporation (PMCC). Until it was spun off from Altria in March 2008, Philip Morris International (PMI) was also one of Altria's operating companies, but Altria felt that PMI would be better able to operate outside of the legal constraints on smoking in the United States. Altria closed recently at just under $29 a share, near the top of its 52-week trading range of $23.20-30.40 per share, with a yield of 5.70% on 12-month dividends of $1.64 and a price earnings ratio of 17.25. The cigarette industry is operating under a cloud as governments in several countries (including the United States and Australia) are threatening to impose advertising restrictions that would emphasize the health hazards of smoking. Battery-operated "electronic cigarettes" (or "e-cigarettes") are one of the latest threats to tobacco companies, although some cigarette manufacturers have started offering their own electronic smokes. The tobacco industry faces many challenges that are quite separate from the economic vicissitudes that impact other companies, but dividend-oriented investors continue to find this area attractive. Altria will host a live audio webcast on January 27, 2012 to discuss its 2011 fourth-quarter and full-year business results. For Altria, operating cash flow stands at $3.6 billion.

Shares of Lockheed Martin Corp. (NYSE:LMT) closed slightly over $83 a share recently, near the top of their 52-week range of $$66.36-$83.71. Based on dividends of $4 per share, the stock's yield was 3.93%. Bloomberg estimates Lockheed's full year earnings per share in 2011 at $7.31, with a market cap of $26.8 billion. Its price earnings ratio of 8.8% indicates that the stock is modestly priced, especially given the size and history of the company. While the United States wants a leaner military and Intel's growth may slow, President Obama says he wants "… to be able to ensure our security with smaller conventional ground forces." Speaking at a recent news conference, Obama vowed to, "… continue to get rid of outdated Cold War-era systems so that we can invest in the capabilities we need for the future, including intelligence, surveillance and reconnaissance ..." Indeed, Lockheed has been awarded several multi-million federal contracts by the U.S. Air Force and Defense Department. Lockheed will announce its fourth quarter and year-end 2011 results at a live web cast on January 26, 2012. Its operating cash flow was approximately $3.2 billion over the last twelve months.

ADRs of U.K.-based Vodafone Group Plc (NASDAQ:VOD) closed recently over $27 a share, in the upper third of their 52 week range of $24.31-$29.75. The stock had a yield of 5.4% and a price earnings ratio of 12.8%. With operations all over the world, Vodafone has been actively investing for its future, purchasing other companies as well as its own shares ­- acquiring 1.27 billion of them since June 20. In addition to investments in emerging nations, it owns a 45% stake in Verizon Wireless (NYSE:VZ). Investors seem optimistic about Vodafone's future, but the company carries a lot of debt. What's more investing in this sector is tricky because competition is high and the capital costs involved are considerable. Vodafone may be attractive for investors comfortable with a greater degree of speculation in pursuit of growth potential and income. Vodafone's operating cash flow was over $18 billion last year.

Intel Corporation (NASDAQ:INTC) shares closed trading recently at more than $25 per share, near the upper end of their 52-week range of $19.16-$25.92. The stock's yield was 3.2% on dividends of $0.84 per share and earnings of $2.39, with a price earnings ratio of 11.4. Tech has been on a roll recently; the Nasdaq 100 is at its highest level in ten years, and the sector has continued to do well to date in 2012. Chipmakers in general have been on the rise, and Intel shares more than kept pace, rising 14% in the last six months. Last August Intel bought McAfee, a computer antivirus software maker, for about $7.7 billion in cash, giving the company an entrance into the growing security tech sector. Its high yield and $129 billion market cap made Intel one of the so-called "Dogs of the Dow" - one of ten stocks on the Dow Jones Industrial Average with the highest dividend yield. That fact is likely to attract some investors to the stock, creating an artificial demand, at least for a time. Conservative, long-term investors still have good reasons to buy and hold this "blue chip." In its last full fiscal year, cash flow from all operating activities came in at $16.6 billion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.