Here are four important directional metrics that I look for when updating my stock database...
1. Declining Shares
Many companies sell stock to raise cash. The important question is what is the company going to do with the cash? Is it for an acquisition or "general corporate purposes?" The latter is code for the business is not generating enough cash to stay afloat on its own. I am wary of a company that consistently has more shares outstanding in the current year when compared to the prior year. As I enter updates to my database, equal or lower shares outstanding is a sign of a healthy business.2. Declining Debt
When companies need to raise cash and selling shares is not a good option, they often will issue debt. Once again, the important question is what is the company going to do with the cash? Like issuing shares, debt for a strategic acquisition is much more palatable than for "general corporate purposes." I am wary of a company that consistently has more debt outstanding than the year before. As I enter updates to my database, I make note of companies with a declining debt balance and see that as a sign of a healthy business.3. Rising Equity
Changes in shareholder's equity are a result of earnings, dividends paid, treasury stock purchased, stock options exercised and stock issued. If shares outstanding aren't increasing, and equity is rising then the business is generating sufficient earnings to cover dividends and share repurchases. Increasing the value of the company by running the business well is a sign of a healthy company.4. Rising Free Cash Flow/Share
Ultimately, we want our investments to generate more free cash flow so they can pay us higher dividends. Free cash flow is an important metric in that it excludes cash generated from issuing stock or issuing debt or selling off parts of the business. Free cash flow is limited to only the cash generated from running the business.Dividend Stocks Headed In The Right Direction
Combining the equity and debt metrics, I looked for companies with a declining Debt to Total Capital ratio, and combining the free cash flow and shares outstanding metrics, I looked for a rising free cash flow per share. Below are a few companies I noted that exhibited each of the above characteristics:[List]
AFLAC Incorporated (AFL) provides supplemental health and life insurance in Japan and the U.S. Products are marketed at work sites and help fill gaps in primary coverage.
Debt to Total Capital | 2010: 35%, TTM: 18%
Free Cash Flow/Share | 2010: $7.39, TTM: $7.40
Yield: 3.2%
Medtronic plc (MDT) is a global medical device manufacturer with leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management and other medical markets.
Debt to Total Capital | 2010: 39%, TTM: 33%
Free Cash Flow/Share | 2010: $2.79, TTM: $3.41
Yield: 2.4%
Businesses can pay dividends with cash generated from many sources. They can generate cash by issuing shares, which dilutes our ownership. They can generate cash by issuing debt, which burdens the company with interest payments. Or, they can generate cash by running the business well, which neither dilutes the current shareholders' interest or burdens them with future cash payments. Which would you rather have?
Full Disclosure: Long AFL,
Related Articles
- 5 Dividend Growth Stocks With Strong Capital Appreciation
- 5 Higher Yielding Basic Materials Stocks With Growing Dividends
- 4 Dividend Growth Stocks That Could Make You Wealthy
- A Roadmap To Build Wealth With Dividend Stocks
- High-Yield Managed Distribution Policy Funds
Tags: AFL, MDT,
.
