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A while back, I wrote this post about stocks that have good record of free cash flow and naturally they also gave a lot of dividends. I thought I would just delve a bit deeper into how free cash flow affects dividend while also looking at 1 or 2 other factors.
Basically, to determine whether a company can consistently pay dividends and grow them, we need to know:
1. The firm's balance sheet, esp the size of its debt
2. The firm’s ability to generate good cashflow or even grow it
3. The top management’s willingness in actually paying dividends
4. If it actually gets paid out, what is the yield?
The first thing I usually look at would be the firm’s long term track record in generating free cash flow, which is operating cashflow minus capex, ie the cashflow that is left after deducting money invested in new equipment, new plants etc. The thinking is that the remaining cashflow can be used to pay down debt or pay out dividend. If the firm has no debt (that’s why Criteria 1 is there), then the money should logically flow into dividends.
On the same post, I only managed to screen out 30-40 companies that have consistently generated positive free cashflow. This is out of 700 listed companies in Singapore. This shows how difficult it is to actually produce enough cash to give out dividends. Read more...[caption id="attachment_2449" align="alignright" width="150" caption="Photo by Pink Sherbet Photography"][/caption]
A while back, I wrote this post about stocks that have good record of free cash flow and naturally they also gave a lot of dividends. I thought I would just delve a bit deeper into how free cash flow affects dividend while also looking at 1 or 2 other factors.
Basically, to determine whether a company can consistently pay dividends and grow them, we need to know:
1. The firm's balance sheet, esp the size of its debt
2. The firm’s ability to generate good cashflow or even grow it
3. The top management’s willingness in actually paying dividends
4. If it actually gets paid out, what is the yield?
The first thing I usually look at would be the firm’s long term track record in generating free cash flow, which is operating cashflow minus capex, ie the cashflow that is left after deducting money invested in new equipment, new plants etc. The thinking is that the remaining cashflow can be used to pay down debt or pay out dividend. If the firm has no debt (that’s why Criteria 1 is there), then the money should logically flow into dividends.
On the same post, I only managed to screen out 30-40 companies that have consistently generated positive free cashflow. This is out of 700 listed companies in Singapore. This shows how difficult it is to actually produce enough cash to give out dividends. Read more...
[/caption]
A while back, I wrote this post about stocks that have good record of free cash flow and naturally they also gave a lot of dividends. I thought I would just delve a bit deeper into how free cash flow affects dividend while also looking at 1 or 2 other factors.
Basically, to determine whether a company can consistently pay dividends and grow them, we need to know:
1. The firm's balance sheet, esp the size of its debt
2. The firm’s ability to generate good cashflow or even grow it
3. The top management’s willingness in actually paying dividends
4. If it actually gets paid out, what is the yield?
The first thing I usually look at would be the firm’s long term track record in generating free cash flow, which is operating cashflow minus capex, ie the cashflow that is left after deducting money invested in new equipment, new plants etc. The thinking is that the remaining cashflow can be used to pay down debt or pay out dividend. If the firm has no debt (that’s why Criteria 1 is there), then the money should logically flow into dividends.
On the same post, I only managed to screen out 30-40 companies that have consistently generated positive free cashflow. This is out of 700 listed companies in Singapore. This shows how difficult it is to actually produce enough cash to give out dividends. Read more...
