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Thursday, March 15, 2012

In Search Of Dividend Growth: Dividend To Free Cash Flow

One of the most reliable means of assessing a company's financial standing is its free cash flow (FCF). It is a measure of financial performance, obtained by subtracting capital expenditures from operating cash flow:

FCF = Operating Cash Flow - Capital Expenditures

The FCF is the cash that a company can generate after accounting for the money required to maintain and run the business. More exactly, the capital expenditures in the formula are the expenditures necessary to maintain growth at the current rate. This highlights the significance of FCF as an indicator of a company's financial flexibility and strength as this cash is available to be used for dividends, share buybacks, reducing debt, growing the business beyond the already planned growth rate, or otherwise enhancing shareholder value.

The objective of this article is to start with a large list of dividend growth stocks; eliminate those with a current dividend yield of under 3%, and try to find the ones with the best potential for maintaining and increasing their dividends in the future. The companies with a low dividend-to-free-cash-flow ratio have disposable cash to spend as they see fit. The list of companies we start with have shown the inclination to increase their dividends regularly and consistently, so the ones with excess cash are more likely to continue to do so. Therefore, we will utilize the dividend to free cash flow ratios and the payout ratio in achieving our goal. Read More.

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