Exxon Mobil is among the companies whose yield on free cash flow indicates strong support for the payout’s resilience. Here, an Exxon refinery in Rotterdam, Netherlands.
Dean Mouhtaropoulos/Getty Images
Quarterly dividend payments can be a lifeline for investors who depend on income, retirees in particular. Those cash payments, however, don’t just appear out of thin air.
A crucial foundation for dividends is a company’s free cash flow, essentially its cash from operations minus its capital expenditures. Without positive cash flow, a company might have to borrow to pay its dividend or cut or suspend it, if it has one at all.
As John Tobin of Epoch Investment Partners recently put it to Barron’s, a company has five options for its cash flow: paying down debt, buying back its own stock, investing in internal business growth, acquiring another company, and paying a dividend.
For this screen, Barron’s began with the S&P 500 Dividend Aristocrats Index. The 64 members of this group have paid out a higher dividend for at least 25 straight years. Focusing on companies with a market capitalization of at least $50 billion, we then selected the six companies in that index with the highest free cash flow yields, based on FactSet data.
Solid Dividend Footing
As of their most recent fiscal years, these six S&P 500 Dividend Aristocrats had the highest free cash flow yields. Free cash flow, essentially operating cash minus capital expenditures, is an important foundation for dividend payments.
| Company/Ticker | Recent Price | Free Cash Flow Yield | Dividend Yield | Market Capitalization (bil) | YTD Return |
|---|---|---|---|---|---|
| Chubb/CB | $216.55 | 14.7% | 1.5% | $92.3 | 12.5% |
| Archer-Daniels Midland/ADM | 91.17 | 14.2 | 1.8 | 51.3 | 35.6 |
| Exxon-Mobil/XOM | 83.12 | 13.8 | 4.3 | 351.9 | 37.4 |
| Chevron/CVX | 164.22 | 9.6 | 3.5 | 319.8 | 41.4 |
| AbbVie/ABBV | 162.68 | 9.1 | 3.5 | 287.3 | 21.4 |
| International Business Machines/IBM | 130.15 | 8.9 | 5.0 | 117.0 | -1.4 |
Free cash flow yields are as of the end of the most recent fiscal year for each company. Other data as of April 1.
Source: FactSet
FactSet’s calculation took the free cash flow from a company’s latest fiscal year and then divided it into its market capitalization based on the fully diluted common shares used to calculate earnings per share. The stock prices were as of Dec. 31.
Topping the list is insurer Chubb (ticker: CB) with a free cash flow yield of 14.7%. The company, whose business lines include property-and-casualty insurance, pointed out on its fourth-quarter earnings call in February that its operating cash flow last year set a record of $11.1 billion. During that period, Chubb paid dividends of about $1.4 billion and repurchased some $4.9 billion of its shares. The stock was recently yielding 1.5%.
Agricultural company Archer Daniels Midland (ADM) notched a free cash flow yield of 14.2%, placing second in this screen. The company generated nearly $6.6 billion of operating cash flow in 2021. Its free cash totaled about $5.4 billion, according to FactSet. The company spent $834 million on dividends last year, up about 3% from $809 in 2020. The stock’s yield was recently at 1.8%.
Moving down the list, energy giant Exxon Mobil
(XOM) finished third with a free cash flow yield of 13.8%. The company’s cash flow from operating activities totaled $48 billion last year, its highest level since 2012—clearly helped by rising oil prices. The company said that the free cash flow covered capital expenditures, paying down debt and distributing the dividend. But in recent years, Exxon Mobil’s free cash flow wasn’t covering its dividend amid weak energy prices.
But the company’s free cash flow of about $38 billion easily covered its common stock dividend payments of about $15 billion last year.
Chevron (CVX) was in fourth place with a free cash flow yield of 9.6%. It too was helped by rising crude prices. Last year the company’s free cash flow totaled a record $21.1 billion, up from $1.7 billion in 2020. Its dividend yield was recently at around 3.5%.
CEO Michael Wirth told analysts early this year that the cash helped the company address its four financial priorities in 2021: raising the dividend, continuing capital expenditures, “significant debt paydown,” and buying back stock for the 14th out of the past 18 years. The stock yields about 3.5%.
AbbVie (ABBV), a biopharmaceutical company that’s been popular with income investors, had a free cash flow yield of 9.1%. It was recently yielding 3.5%. Its blockbuster drug has been Humira, whose applications include rheumatoid arthritis—though competition for that drug is looming.
International Business Machines (IBM) came in sixth with a free cash flow yield of 8.9%. Its dividend yield, however, topped the list at 5%.
The company has consistently raised its dividend, albeit in small increments recently. Nearly a year ago, for example, IBM’s board declared a quarterly dividend of $1.64 a share, up by a penny.
Write to Lawrence C. Strauss at [email protected]
