Ultimately, cash flow is what drives the value of any financial asset. The reason analysts look at revenue, EPS, EBIT, EBITDA and margins, they are trying to estimate the level of cash the company will generate in the future.
Dividends In DownturnsWhen a company consistently generates more cash than it uses, it is able to increase dividends paid, buy back shares, reduce debt, or acquire other companies. However, as we learned in the 2008-2009 economic downturn, businesses sometimes go through lean times.
When the economy slows, investors in dividend growth stocks not only expect their dividends to continue, but they also expect them to continue to grow. Some companies do it with debt or by issuing shares.
However, some really fortunate companies are able to access the cash from an unusual place... directly from their balance sheet.
Cash To Dividend CoverageDividend Cash Coverage is one of the metrics I track in my D4L-Data database. Keep in mind the cash coverage is based on total cash, not just domestic (U.S.) cash. Foreign cash is generally not available to pay U.S. dividends without the Corporation having to pay taxes on bringing the cash back into the country.
This week, I screened my dividend growth stocks database for 4 and 5-Star companies with a debt to total capital less than 40%, free cash payout less than 60%, yield above 2.00% and a dividend cash coverage greater than two times. The results are presented below:
Texas Instruments Inc. (TXN) is of the world's largest manufacturers of semiconductors, this company also produces scientific calculator products and DLP products for TVs and video projectors. The company has paid a cash dividend to shareholders every year since 1962 and has increased its dividend payments for 12 consecutive years.
Yield: 2.4% | Coverage: 2.2 Times
T. Rowe Price Group Inc. (TROW) operates one of the largest no-load mutual fund and life cycle fund complexes in the United States, with September 30 AUM of $731 billion. The company has paid a cash dividend to shareholders every year since 1986 and has increased its dividend payments for 27 consecutive years.
Yield: 2.5% | Coverage: 3.5 Times
Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer products industries. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 52 consecutive years.
Yield: 2.8% | Coverage: 4.2 Times
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. The company has paid a cash dividend to shareholders every year since 2011 and has increased its dividend payments for 5 consecutive years. See full analysis here.
Yield: 3.0% | Coverage: 12.6 Times
Microsoft (MSFT), the world's largest software company, develops PC software, including the Windows operating system and the Office application suite. The company has paid a cash dividend to shareholders every year since 2003 and has increased its dividend payments for 13 consecutive years.
Yield: 3.0% | Coverage: 8.6 Times
Erie Indemnity Co. (ERIE) is a management services company that provides sales, underwriting, and policy issuance services to the policyholders of Erie Insurance Exchange in the United States. The company has paid a cash dividend to shareholders every year since 1991 and has increased its dividend payments for 25 consecutive years.
Yield: 3.1% | Coverage: 2.7 Times
Emerson Electric Co. (EMR) designs and supplies product technology, and delivers engineering services and solutions to a wide range of industrial, commercial and consumer markets around the world. The company has paid a cash dividend to shareholders every year since 1947 and has increased its dividend payments for 59 consecutive years.
Yield: 3.4% | Coverage: 2.4 Times
As an investor in dividend growth stocks, I want to know my company is financially capable of paying me a higher dividend each year, and the cash flow statement is the first place to look when making this determination. Cash on the balance sheet is like an insurance policy for the times when the business or the economy sputters.
Full Disclosure: Long TXN, JNJ, CSCO, MSFT, ERIE, EMR, in my Dividend Growth Stocks Portfolio. See a list of all my dividend growth holdings here.
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- Why Dividends Matter
Tags: TROW, TXN, JNJ, CSCO, MSFT, ERIE, EMR,