To identify the companies with ample room to increase their dividend payout, I used the following criteria:
- A Free Cash Flow Dividend Payout (FCFp) of 40% or less. This means that 60% of the company's cash, after operating expenses, is going elsewhere.
- A sum of Debt to Total Capital (Debt) + FCFp of less than 55%. This should help weed out the companies holding the cash to pay interest.
- Trailing 12-month Free Cash Flow per share is greater than an average of the last 3 years. This weeds out companies where cash flow is decreasing.
- Cash on the balance sheet in excess of short-term debt. This weeds out companies that may have an immediate debt-servicing need for the cash.
- Yield greater than 2.0%.
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: 22.3%
- Debt + FCFp: 36.3%
- Cash/ST Debt: n/a (no ST debt)
- Yield: 2.7%
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: 27.9%
- Debt + FCFp: 37.3%
- Cash/ST Debt: n/a (no ST debt)
- Yield: 3.7%
Mercury General Corp., (MCY) operating primarily in California, writes a full line of automobile coverage for all classifications of risk.
- FCF Payout: 22.3%
- Debt + FCFp: 38.3%
- Cash/ST Debt: n/a (no ST debt)
- Yield: 4.8%
You could view this from a positive perspective and say the above dividends should be very safe and the companies are in an excellent position to continue to raising them each year. In dividend investing, cash is king, but at some point management has to be willing to share it with the company's owners.
Full Disclosure: Long AFL, CTBI and MCY in my Dividend Growth Stocks Portfolio.
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