Free Cash Flow is Operating Cash Flow less normal capital expenditures (capital expenditures is usually the first line in the investing section). For a business to remain viable, it must replace capital assets when they wear out. That's why I prefer Free Cash Flow over Operating Cash Flow.
Free Cash Flow tells you how much cash the company has left over after paying the normal operating expenses. This is the cash that is used to pay for acquisitions, debt obligations, and yes, dividends!
The formula for Free Cash Flow Payout is simply the Annual Dividend Per Share divided by Free Cash Flow Per Share. I like to see a percentage of 70% or less. The 70% is somewhat higher than many people look for with a traditional payout ratio. I am comfortable with the higher number since we are talking about real cash generated from running the business vs. accounting earnings that may or may not be there.
This week I screened my database for select stocks with:
- A free cash flow payout below 45%
- A dividend yield over 3%
The select results are presented below:
Parker-Hannifin Corp (PH) is a global maker of industrial pneumatic, hydraulic and vacuum motion/control systems, including related pumps, valves, filters, hoses, etc. Its products are used in everything from jet engines to autos, trucks and utility turbine
FCF Payout: 25.4% | Yield: 3.0%
Cincinnati Financial Corp. (CINF) is an insurance holding company that primarily markets property and casualty coverage. It also conducts life insurance and asset management operations.
FCF Payout: 30.8% | Yield: 3.4%
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.
FCF Payout: 15.1% | Yield: 3.5%
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.
FCF Payout: 40.8% | Yield: 3.6%
The data present 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 some additional probing.
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 CINF, AFL, CSCO,
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Tags: PH, CINF, AFL, CSCO,
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