1. Declining SharesMany 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 DebtWhen 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 EquityChanges 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/ShareUltimately, 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 DirectionCombining 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 several companies I noted that exhibited each of the above characteristics:
Automatic Data Processing Inc. (ADP) is one of the world's largest independent computing services companies, providing a broad range of data processing services.
Debt to Total Capital | 2005: 1%, TTM: 1%
Free Cash Flow/Share | 2005: $2.10, TTM: $3.06
Cullen/Frost Bankers, Inc. (CFR) is one of the largest multi-bank holding company headquartered in Texas, has more than 110 offices in various cities in the state.
Debt to Total Capital | 2005: 30%, TTM: 15%
Free Cash Flow/Share | 2005: $2.13, TTM: $5.23
Erie Indemnity Co. (ERIE) provides sales, underwriting, and policy issuance services to the policyholders of Erie Insurance Exchange in the United States.
Debt to Total Capital | 2005: 0%, TTM: 0%
Free Cash Flow/Share | 2005: $4.33, TTM: $6.93
Genuine Parts Co. (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.
Debt to Total Capital | 2005: 16%, TTM: 15%
Free Cash Flow/Share | 2005: $2.03, TTM: $3.57
Owens & Minor Inc. (OMI) is a leading domestic distributor of medical and surgical supplies to the acute care market, a health care supply chain management company, and a direct-to-consumer (DTC) supplier of testing and monitoring supplies for diabetes.
Debt to Total Capital | 2005: 29%, TTM: 20%
Free Cash Flow/Share | 2005: $1.75, TTM: $3.08
The Procter & Gamble Company (PG) is a leading consumer products company that markets household and personal care products in more than 180 countries.
Debt to Total Capital | 2005: 38%, TTM: 33%
Free Cash Flow/Share | 2005: $2.65, TTM: $3.46
RPM International Inc. (RPM) makes specialty coatings and products for the structural waterproofing and corrosion control markets, as well as products for the consumer, do-it-yourself, and hobby markets.
Debt to Total Capital | 2005: 44%, TTM: 43%
Free Cash Flow/Share | 2005: $0.81, TTM: $1.34
J.M. Smucker Co.'s (SJM) products include coffee, fruit spreads, peanut butter, shortening and oils, ice cream toppings, health and natural foods, and beverages. The Folgers coffee business was acquired in November 2008.
Debt to Total Capital | 2005: 21%, TTM: 19%
Free Cash Flow/Share | 2005: $1.84, TTM: $3.69
Sonoco Products Co. (SON) makes paper and plastic packaging products serves various industries and markets in more than 85 countries.
Debt to Total Capital | 2005: 38%, TTM: 29%
Free Cash Flow/Share | 2005: $0.98, TTM: $1.68
Suburban Propane Partners LP (SPH) is a limited partnership that markets propane gas and other refined fuels to residential, commercial, industrial, and agricultural customers.
Debt to Total Capital | 2005: 88%, TTM: 44%
Free Cash Flow/Share | 2005: $0.33, TTM: $3.67
AT&T Inc. (T) provides telephone and broadband service and holds full ownership of AT&T Mobility (formerly Cingular Wireless). AT&T Corp. was acquired in late 2005 and BellSouth in late 2006.
Debt to Total Capital | 2005: 42%, TTM: 39%
Free Cash Flow/Share | 2005: $2.10, TTM: $2.50
V.F. Corp. (VFC) is a global apparel company, with leading shares in denim and daypacks. It is transforming itself into a designer and marketer of lifestyle apparel brands.
Debt to Total Capital | 2005: 22%, TTM: 20%
Free Cash Flow/Share | 2005: $4.11, TTM: $9.46
Verizon Communications Inc. (VZ) offers wireline, wireless and broadband services primarily in the northeastern United States. It acquired MCI Inc in 2006 and has since sold or spun off non-core assets. Alltel was acquired in early 2009.
Debt to Total Capital | 2005: 50%, TTM: 39%
Free Cash Flow/Share | 2005: $2.37, TTM: $6.07
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 ADP, GPC, OMI, PG, T. See a list of all my income holdings here.
- 13 Dividend Stocks With A Good Yield/Growth Mix
- High-Yield Dividend Stocks: A Safer Approach
- When Is A Lot of Cash A Bad Thing?
- 7 Investor Traits to Achieve Success
- Five Stocks With A Low Debt To Total Capital
Tgs: [ADP] [CFR] [ERIE] [GPC] [OMI] [PG] [RPM] [SJM] [SON] [SPH] [T] [VFC] [VZ]