First, dividends are paid in cash. Therefore, if a company is going to pay a dividend it must have cash available. If the company is going to consistently pay and grow its dividend, it must have a vibrant business model that generates a growing level of cash. Unfortunately, most businesses have a degree of variability in which earnings and cash don't grow in a smooth line.
How well a company can absorb these ups and downs is reflected in its free cash flow payout. Free cash flow payout is calculated as dividends divided by free cash flow (operating cash flows less normal capital replacements). Components of free cash flow is found on the Cash Flow Statement. Free cash flow tells you how much cash the company has left over after paying the normal operating expenses. This is the cash used to pay for acquisitions, debt obligations and dividends!
Second, it is not enough to just generate the cash, it has to be available for dividend payments. Many companies generate significant free cash flow, but often that cash is already spoken for in the form of debt obligations. To gauge the relative amount of debt a company is carrying, I look at a debt to total capital metric.
For both free cash flow and debt to total capital, the lower the number the safer the dividend. However, if free cash flow payout is too low, you might question the company's commitment to its dividend.
This week week, I screened my dividend growth stocks database for companies with a debt to total capital less than 40, free cash payout less than 60% and with a yield above 3.0%. The results are presented below:
MDU Resources Group Inc. (MDU)
Yield: 3.1% | Debt/Capital: 34.5% | FCF Payout: 46.7%
MDU Resources Group Inc. is involved in electric and natural gas distribution, natural gas storage, gathering and transmission, construction materials and mining, and oil and natural gas production.
Genuine Parts Company (GPC)
Yield: 3.2% | Debt/Capital: 14.6% | FCF Payout: 59.1%
Genuine Parts Co is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.
Polaris Industries Inc. (PII)
Yield: 3.2% | Debt/Capital: 34.6% | FCF Payout: 26.3%
Polaris Industries Inc. designs, engineers, and manufactures all terrain vehicles, snowmobiles, and motorcycles.
Procter & Gamble (PG)
Yield: 3.2% | Debt/Capital: 32.0% | FCF Payout: 59.3%
The Procter & Gamble Company is a leading consumer products company that markets household and personal care products in more than 180 countries.
Intel Corporation (INTC)
Yield: 3.2% | Debt/Capital: 4.2% | FCF Payout: 54.0%
Intel Corporation is the world's largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products.
Johnson & Johnson (JNJ)
Yield: 3.5% | Debt/Capital: 23.2% | FCF Payout: 47.1%
Johnson & Johnson is a leader in the pharmaceutical, medical device and consumer products industries.
ConocoPhillips Co. (COP)
Yield: 3.7% | Debt/Capital: 24.7% | FCF Payout: 20.0%
ConocoPhillips Co. was formed via the 2002 merger of Phillips Petroleum and Conoco, is the fourth largest integrated oil company in the world.
Cullen/Frost Bankers, Inc. (CFR)
Yield: 3.8% | Debt/Capital: 30.3% | FCF Payout: 27.3%
Cullen/Frost Bankers, Inc., is one of the largest multi-bank holding company headquartered in Texas, has more than 110 offices in various cities in the state.
Nucor Corporation (NUE)
Yield: 4.0% | Debt/Capital: 35.9% | FCF Payout: 42.0%
Nucor Corporation is the largest minimill steelmaker in the U.S., and has one of the most diverse product lines of any steelmaker in the Americas.
Meredith Corp. (MDP)
Yield: 4.2% | Debt/Capital: 20.8% | FCF Payout: 41.8%
Meredith Corp. derives its earnings mainly from magazine publishing (primarily Better Homes and Gardens and Ladies' Home Journal) and ownership of 12 TV stations.
Community Trust Bank Corp. (CTBI)
Yield: 4.6% | Debt/Capital: 21.8% | FCF Payout: 35.4%
Community Trust Bank Corp. owns and operates Community Trust Bank, Inc. of Pikeville, KY, which provides commercial banking services in Kentucky and West Virginia; and a trust company.
Leggett & Platt, Inc. (LEG)
Yield: 4.7% | Debt/Capital: 36.1% | FCF Payout: 51.5%
Leggett & Platt Inc. makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as diversified products for non-furnishings markets.
Verizon Communications Inc. (VZ)
Yield: 5.3% | Debt/Capital: 37.3% | FCF Payout: 47.9%
Verizon Communications Inc. offers wireline, wireless and broadband services primarily in the northeastern United States. It acquired MCI in 2006 and has since sold or spun off non-core assets. Alltel was acquired in early 2009.
As with past screens, the data presented 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 additional due diligence.
My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 210+ 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 COP, CTBI, NUE, JNJ, VZ, LEG, INTC, GPC, PG. See a list of all my dividend growth holdings here.
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