It's not that most companies have done anything wrong when preparing their Statement of Earnings, but under Generally Accepted Accounting Principles (GAAP) a lot of the entries have nothing to do with today's operations. Given this, I generally avoid most earnings related metrics (e.g. EBIT, EBITDA, payout ratio, etc.)
The cash flow statement is not based on accrual accounting, but instead is a cash-basis report focusing on inflows and outflows of cash. It adjusts for transactions that do not directly affect cash receipts and payments, such as adding depreciation back to net earnings. The cash flow statement allows investors to understand how a company's operations are running, where the cash is coming from and how it is being spent.
As an investor in dividend growth stocks, I want to know if a company is financially capable of paying me a higher dividend each year. That's why I focus on cash-based metrics such as these:
Free Cash Flow
This has many definitions, but the one I use is operating cash flow less capital expenditures. Capital expenditures are deducted since you can't run a business for any period of time without expending some level of capital. These two numbers are easily located on the Statement of Cash Flows. This is the best snapshot of what cash the business has generated from "normal" operations and is available for dividends, debt, acquisitions and purchases of treasury stock.Cash Flow Per Diluted Share
GAAP Earnings Per Share (EPS) has the same short-comings as GAAP earnings. When looking at per numbers I prefer a cash-based number. Cash Flow Per Diluted Share is calculated by taking the Free Cash Flow from above and dividing it by diluted shares outstanding (available on the Statement of Earnings).Cash Payout Ratio
Dividend investors love payout ratios (dividends per share divided by EPS). Given my concerns with GAAP earnings and EPS, I once again prefer a cash-based version. The Cash Payout Ratio is calculated by dividing dividends per share by Cash Flow Per Diluted Share. Care should be taken when interpreting this ratio. For example, sometimes a high ratio with low debt is better than a low ratio with high debt.Cash Return on Capital Employed
This is simply Free Cash Flow divided by Total Capital (debt + equity). Again, I prefer using a cash number in the numerator. A lot of investors look at return on assets and return on equity. Each are flawed beyond their GAAP numerator. Return on assets ignores the liabilities side of the balance sheet, while return on equity ignores the debt component of capital.You can fake earnings, but you can't fake cash.
This week, I screened my dividend growth stocks database for select non-financial dividend stocks that have a free cash flow payout of 50% or less with a yield of 3.0% or more. The results are presented below:
Genuine Parts Co. (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products. Yield: 3.0% | FCF Payout: 40.4%
Weyco Group, Inc. (WEYS) designs and markets footwear for men, women and children under various brand names, including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters and Umi. Yield: 3.2% | FCF Payout: 35.2%
Alliant Energy Corporation (LNT) provides electric and natural gas utility services, and also has various unregulated energy, freight transportation and other investments. Yield: 3.2% | FCF Payout: 39.1%
J.M. Smucker Co.'s (SJM) products include coffee, peanut butter, fruit spreads, shortening and oils, ice cream toppings, health and natural foods, and beverages. Yield: 3.4% | FCF Payout: 44.8%
Phillips 66 (PSX), spun off from ConocoPhillips in 2012, is one of the largest independent refiners and marketers of petroleum products in the U.S. Yield: 3.4% | FCF Payout: 48.9%
Cardinal Health Inc. (CAH) is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies and related products to a broad range of health care customers. Yield: 4.0% | FCF Payout: 25.2%
Abbvie Inc. (ABBV) is a global research-based pharmaceuticals business that emerged as a separate entity following its spin-off from Abbott Laboratories at the start of 2013. AbbVie's key drug is Humira for rheumatoid arthritis. Yield: 4.9% | FCF Payout: 41.8%
IBM's (IBM) global offerings include information technology services, software, computer hardware equipment, fundamental research, and related financing. Yield: 5.2% | FCF Payout: 44.9%
As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor business 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 200+ 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 GPC, ABBV,
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Tags: GPC, WEYS, LNT, ABBV, SJM, PSX, CAH, IBM,
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