Wednesday, September 30, 2020

7 Higher Yielders With A Low Free Cash Flow Payout

All dividend growth stocks are not created equal. Good companies maintain their dividends during a downturn (like the one we experienced in 2008); while great companies continue to increase their dividends during a downturn. To find these great companies, you will need to focus on more than just yield. You need to consider the stock's Free Cash Flow Payout.

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 am screened my database for select stocks with:

- A free cash flow payout below 35%
- A dividend yield of 3.0% or greater

The results are presented below:

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: 32.7% | Yield: 3.1%

Tompkins Financial (TMP) provides a full range of banking and financial service products to individuals, corporations and municipal customers in the U.S. Northeast.
FCF Payout: 32.1% | Yield: 3.7%

Matthews International Corp. (MATW) primarily designs, manufactures, and markets custom-made identification products. FCF Payout: 23.0% | Yield: 3.9%

Eaton Vance Corp. (EV) engages in the creation, marketing and management of investment funds in the US. EV also provides investment management and counseling services to institutions and individuals.
FCF Payout: 25.2% | Yield: 4.2%

Community Trust Bank Corp. (CTBI) owns and operates Community Trust Bank, Inc., which provides commercial banking services in Kentucky, Tennessee and West Virginia; and a trust company.
FCF Payout: 32.9% | Yield: 5.5%

Old Republic Intl (ORI) is an insurance holding company that engages mainly in the general (property and liability), title, and mortgage guaranty and consumer credit indemnity run-off businesses. FCF Payout: 24.7% | Yield: 5.9%

Mercury General Corp. (MCY), operating primarily in California, writes a full line of automobile coverage for all classifications of risk.
FCF Payout: 42.0% | Yield: 6.1%

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 150+ 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, CTBI, ORI, MCY,

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