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 another company. 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 dividend to continue, but they also expect it 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
Below are several companies that have accumulated large balances of cash relative to their dividends, along with the percentage of cash on hand compared to the cash paid for dividends over the last twelve months:
Intel Corporation (INTC)
Yield: 3.4% | Coverage: 115%
Intel Corporation is the world’s largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products.
Yield: 2.4% | Coverage: 141%
Microsoft, the world’s largest software company, develops PC software, including the Windows operating system and the Office application suite.
Cincinnati Financial Corp. (CINF)
Yield: 5.6% | Coverage: 150%
Cincinnati Financial Corp. markets primarily property and casualty coverage. It also conducts life insurance and asset management operations.
ConocoPhillips Co. (COP)
Yield: 3.5% | Coverage: 183%
ConocoPhillips Co. was formed in 2002 when Phillips Petroleum and Conoco merged and is now is the fourth largest integrated oil company in the world
Wal-Mart Stores, Inc. (WMT)
Yield: 2.7% | Coverage: 205%
Wal-Mart Stores, Inc. is the largest retailer in North America and operates a chain of discount department stores, wholesale clubs, and combination discount stores and supermarkets.
Lowe’s Companies, Inc. (LOW)
Yield: 2.3% | Coverage: 254%
Lowe’s Companies, Inc. sells retail building materials and supplies, lumber, hardware and appliances through more than 1,700 stores in the U.S. and Canada.
Lockheed Martin Corp. (LMT)
Yield: 3.6% | Coverage: 337%
Lockheed Martin Corp. is the world’s largest military weapons manufacturer and is also a significant supplier to NASA and other non-defense government agencies receiving about 93% of its revenues from global defense sales.
Johnson & Johnson (JNJ)
Yield: 3.2% | Coverage: 377%
Johnson & Johnson is a leader in the pharmaceutical, medical device and consumer products industries.
Aflac Incorporated (AFL)
Yield: 2.7% | Coverage: 387%
Aflac Incorporated provides supplemental health and life insurance in the U.S. and Japan. Products are marketed at work sites and help fill gaps in primary insurance coverage. Approximately 80% of earnings comes from Japan and 20% from the U.S.
Walgreen Co. (WAG)
Yield: 1.7% | Coverage: 426%
Walgreen Co. is the largest U.S. retail drug chain in terms of revenues. It operates more than 8,000 drug stores throughout the U.S. and Puerto Rico. Just last week WAG decided to access some of this cash with a record 28% dividend increase.
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 sputters.
Full Disclosure: Long INTC, CINF, COP, WMT, LOW, LMT, JNJ, AFL, WAG. See a list of all my dividend growth holdings here.