Ultimately, cash flow is what drives the value of any financial asset. The reason analysts look at revenue, EPS, EBIT, EBITDA and margins, they are trying to estimate the level of cash the company will generate in the future.
Dividends In Downturns
When a company consistently generates more cash than it uses, it is able to increase dividends paid, buy back shares, reduce debt, or acquire other companies. However, as we learned in the 2008-2009 economic downturn, businesses sometimes go through lean times.When the economy slows, investors in dividend growth stocks not only expect their dividends to continue, but they also expect them to continue to grow. Some companies do it with debt or by issuing shares.
However, some really fortunate companies are able to access the cash from an unusual place... directly from their balance sheet.
Cash To Dividend Coverage
Dividend Cash Coverage is one of the metrics I track in my D4L-Data database. Keep in mind the cash coverage is based on total cash, not just domestic (U.S.) cash. Foreign cash is generally not available to pay U.S. dividends without the Corporation having to pay taxes on bringing the cash back into the country.This week, I screened my dividend growth stocks database for 4 and 5-Star companies with a debt to total capital less than 40%, free cash payout less than 60%, yield above 2.00% and a dividend cash coverage greater than two times. The results are presented below:
Cisco Systems, Inc. (CSCO) 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. The company has paid a cash dividend to shareholders every year since 2011 and has increased its dividend payments for 7 consecutive years.
Yield: 3.0% | Coverage: 12.9 Times
Archer-Daniels-Midland Co. (ADM) is one of the world's leading agribusiness concerns, with major market positions in agricultural processing and merchandising. The company has paid a cash dividend to shareholders every year since 1927 and has increased its dividend payments for 42 consecutive years.
Yield: 3.2% | Coverage: 7.9 Times
Westwood Holdings Inc. (WHG) provides investment advisory services to a wide range of institutional clients, and also provides trust and custodial services. The company has paid a cash dividend to shareholders every year since 2002 and has increased its dividend payments for 17 consecutive years.
Yield: 4.9% | Coverage: 4.6 Times
Mercury General Corp. (MCY), operating primarily in California, writes a full line of automobile coverage for all classifications of risk. The company has paid a cash dividend to shareholders every year since 1986 and has increased its dividend payments for 30 consecutive years.
Yield: 5.5% | Coverage: 4.8 Times
As an investor in dividend growth stocks, I want to know my company is financially capable of paying me a higher dividend each year, and the cash flow statement is the first place to look when making this determination. Cash on the balance sheet is like an insurance policy for the times when the business or the economy sputters.
Full Disclosure: Long CSCO, ADM, WHG, MCY in various Portfolios. See a list of all my Dividend Growth Portfolio holdings here.
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