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 35%
A dividend yield over 3%
The results are presented below:
Erie Indemnity Co. (ERIE) is a management services company that provides sales, underwriting, and policy issuance services to the policyholders of Erie Insurance Exchange in the United States. FCF Payout: 29.5% | Yield: 3.1%
General Dynamics (GD) is the world's fifth largest military contractor and also one of the world's biggest makers of corporate jets.
FCF Payout: 25.6% | Yield: 3.3%
Bemis Company Inc. (BMS) is a leading maker of a broad range of flexible packaging and pressure-sensitive materials.
FCF Payout: 29.3% | Yield: 3.3%
Aflac Incorporated (AFL) provides supplemental health and life insurance in the U.S. and Japan. Products are marketed at work sites and help fill gaps in primary insurance coverage. Approximately 80% of earnings comes from Japan and 20% from the U.S.
FCF Payout: 5.7% | Yield: 3.4%
Southside Bancshares Inc. (SBSI) owns Southside Bank, which primarily provides financial services to individuals, businesses, municipal entities, and non-profit organizations.
FCF Payout: 19.4% | Yield: 3.9%
Community Trust Bank Corp. (CTBI) owns and operates Community Trust Bank, Inc. of Pikeville, KY, which provides commercial banking services in Kentucky andWest Virginia; and a trust company.
FCF Payout: 23.4% | Yield: 3.8%
ConocoPhillips Co. (COP) is a leading integrated oil company. It recently spun off its downstream operations as a new publicly traded company, Phillips 66.
FCF Payout: 31.3% | Yield: 5.2%
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 220+ 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 GD, AFL, CTBI, COP. See a list of all my income holdings here.