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Tim's Corner: What Matters During Earnings Season

Feb. 17, 2021 4:38 PM ETCAD
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All extremes of feeling are allied with madness.”― Virginia Woolf, Orlando

Image result for 50% offThis instablog post is sponsored by Tim Plaehn, expert on income investing and a friend & colleague of mine at Investors Alley as well as a contributor here on Seeking Alpha. Tim runs the Dividend Hunter newsletter which offers a solid & diverse selection of attractive high yield plays. The service now nearly 10,000 active subscribers and can be had HERE for the rock bottom price of $49 (It usually is $99) for the first year. Tim provides a solid selection of lower beta, high yield recommendations for these challenging times.

An over-indulgence of anything, even something as pure as water, can intoxicate.”― Criss Jami, Venus in Arms


By Tim Plaehn,

Quarterly earnings reports are often the only way you can get real actionable news about companies, their dividends, and potential stock price moves. However, you want to avoid the Wall Street game of whether a company meets or beats the analyst forecasts. For dividend investors, you need to dig into the numbers to find the metrics that matter concerning whether a company will continue, cut, or grow dividend payments.

There are two mistakes for the income-focused investor to avoid.

First, the earnings hit or miss of the consensus estimate is just a game. Wall Street analysts covering a stock put out their estimates of the expected quarterly earnings per share [EPS] and revenue. The consensus estimate is the average of all forecasts from all the analysts covering a particular stock—whether or not the actual results meet or beat the consensus means nothing. As an investor, you want to compare a company’s results year over year and quarter over quarter.

The other issue for investors in high-yield stocks is that the generally accepted accounting principles (GAAP) EPS number does not give an accurate picture of the company’s ability to continue to pay the current dividend rate. The widely used EPS number can greatly under-report the amount of free cash flow a company generates. The GAAP EPS provides net income after all expenses, and these expenses can include non-cash, bookkeeping-only items. If you are a high-yield stock investor, you need to be familiar with some non-GAAP financial metrics.

Income for Life? How to Get $6,851 Per Month Before Social Security, Pension or Any Other Retirement Source

Non-GAAP cash flow metrics vary by the various high-yield stocks sectors. These three are the ones to know and understand.

The real estate investment trust [REIT] sector reports funds from operations (FFO). You can think of FFO as EPS with the non-cash expenses added back in. Another approach is to start with EBITDA (earnings before interest, taxes, depreciation, and amortization) and subtract the cash interest and taxes. Many REITs will report AFFO, which is FFO adjusted for special items.

Energy infrastructure companies use distributable cash flow [DCF] as the metric that indicates the money available to pay dividends. Companies calculate DCF through the same approach REITs use to determine FFO.

Business development companies [BDCS] report net investment income [NII]. A BDC may have loans and/or equity investments with their client companies. Net investment income will be the interest income from loans, and can be counted on to support dividend payments. Capital gains from equity investments will show up as special dividends.

If a company does not fall into one of these categories, the most common cash flow metric will be referred to as cash available for distribution (CAD). You will see CAD used by companies at which determining free cash flow from the income statement may be a difficult task.

As an income-focused investor, you need to dig (it may be easier or harder to find) the AFFO, DCF, NII, or CAD out of a company’s earnings press release or income statement. You want to find or calculate the free cash flow metric per share. You can then determine the dividend coverage. Also, compare the AFFO, DCF, NII, or CAD per share from the current period to the same number for the previous and year-ago quarterly results.

This are the sorts of terms and measurements I share with my Dividend Hunter readers, especially during earnings season. 

Somewhere between love and hate lies confusion, misunderstanding and desperate hope.”― Shannon L. Alder

Tim Plaehn of The Dividend Hunter has developed a monthly dividend calendar. It is yours free when you click here.

Thank You & Happy Hunting,

Bret Jensen

Founder, The Biotech Forum, The Busted IPO Forum & The Insiders Forum

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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