Tuesday, April 5, 2022

5 Stocks With A Strong Cash To Dividend Coverage

Dividends are not paid with sales, earnings, EPS, EBIT or EBITDA. Instead dividends are paid with cash. As an investor, you want to pay close attention to the cash flow statement. Unfortunately, it is probably the least used and most misunderstood statement.

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 Downturns

When 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 Coverage

Dividend 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 select results are presented below:

Medtronic PLC (MDT) is a global medical device manufacturer with leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management and other medical markets.
Yield: 2.4% | Coverage: 3.1 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 June 30 AUM of $776.6 billion.
Yield: 3.2% | Coverage: 3.5 Times

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.
Yield: 3.8% | Coverage: 11.0 Times

Franklin Resources Inc. (BEN) is one of the world's largest asset managers, serving retail, institutional and high-net-worth clients.
Yield: 4.0% | Coverage: 8.0 Times

Mercury General Corp. (MCY), operating primarily in California, writes a full line of automobile coverage for all classifications of risk.
Yield: 4.6% | Coverage: 2.4 Times

Full Disclosure: Long TROW, CTBI, MCY in my Dividend growth Stocks Portfolio.

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