Chevron’s free cash flow yield exceeds its dividend yield, a good sign of the company’s ability to raise payouts. Here, a Chevron station in Mill Valley, Calif., on a recent day.
Justin Sullivan/Getty Images
A company’s free cash is a lifeline for dividends, buybacks and other uses of capital. If that well runs dry or even slows down, a company can be forced to dial down its spending.
For this screen, Barron’s looked for S&P 500 companies whose cash flow yields exceed their dividend yields. When those two metrics line up that way, it suggests that a company has plenty of cash flow to cover its dividend and to increase it.
“That’s a sign that they have a lot of firepower,” says Julian McManus, co-manager at Janus Henderson Global Select Fund (ticker: JORAX) “If they want to raise their dividend, they definitely can.”
He adds that it’s a question of how skilled management teams are in determining the best ways to use that cash “to create the most value for shareholders.”
However, using a cash flow yield to pick stocks should be incorporated with deeper research about a company, including its balance sheet health, growth prospects, free cash flow outlook, and competitive landscape.
Still, a “free cash flow yield is a powerful first cut in finding those companies that are cheaply valued and have the opportunity to raise dividends,” says McManus.
In this screen, which used data from Bloomberg, Barron’s looked for S&P 500 companies with a dividend yield of at least 3%, nearly double the index’s average of around 1.6%, but no more than 4%. The higher the yield, the greater the chances that a stock could be a value trap.
Free Cash Yielders
These are examples of S&P 500 companies whose free cash flow yields exceed their dividend yields, a sign that the dividend is secure cand can grow.
| Company / Ticker | Dividend Yield | Free Cash Flow Yield | Market Value (bil) | YTD Return |
|---|---|---|---|---|
| Principal Financial Group / PFG | 3.8% | 16.6% | $16.9 | -5.7% |
| Regions Financial / RF | 3.8 | 13.9 | 19.8 | -1.3 |
| Exxon Mobil / XOM | 3.6 | 11.9 | 408.3 | 61.8 |
| Chevron / CVX | 3.5 | 9.6 | 321.8 | 42.2 |
| Cisco Systems / CSCO | 3.4 | 7.1 | 187.9 | -26.8 |
| Pfizer / PFE | 3.2 | 11.2 | 283.4 | -12.5 |
| Northern Trust / NTRS | 3.0 | 5.0 | 20.8 | -15.5 |
Data as of July 29.
Sources: Bloomberg and FactSet
To qualify for the screen, a company had to have a cash flow yield greater than its dividend yield for starters. The cash flow yields were calculated on a per-share basis.
Another criterion for the screen was a total debt-to-shareholders’ equity ratio of no more than 50%. The reasoning was that debt-laden companies could have a harder time maintaining, much less raising, their dividends as interest rates rise.
The screen also factored in dividend payout ratios, or the percentage of earnings that get paid out in dividends. Barron’s looked for companies with a ratio below 55%, a pretty conservative number that provides plenty of flexibility for dividend growth.
The accompanying table shows the seven companies that made the cut for this screen.
Principal Financial Group ( PFG
), which helps clients with investing for retirement, including asset management, has one of the biggest spreads between its cash-flow yield and dividend yield, 16.6% to 3.8%. The stock has returned minus 6% this year through the close on July 29, dividends included.
That compares with minus 13% for the S&P 500.
Regions Financial (RF), a regional bank based in Birmingham, Ala., sports a free cash flow yield of nearly 14%, much higher than its recent dividend yield of 3.8%.
Last month the company said it planned to boost its quarterly dividend to 20 cents a share, up 3 cents, or nearly 18%, from 17 cents.
Two large global energy companies— Exxon Mobil (XOM) and Chevron (CVX)—both made the screen’s cut as well. Both companies have benefited from rising oil and gas prices.
Although there were questions earlier in the pandemic about whether Exxon Mobil would be able to sustain its dividend, it finally raised it last fall by a penny to 88 cents a share on a quarterly basis. That move allowed it to remain a member of the S&P 500 Dividend Aristocrats Index. All of those companies have paid out a higher dividend for at least 25 straight years. The company reported on July 29 that its second-quarter free cash flow totaled $16.9 billion, up from about $7 billion in the corresponding period a year earlier. It paid out $3.7 billion in dividends during the most recent quarter.
Chevron ’s second-quarter free cash flow totaled $10.6 billion, up from $5.2 billion a year earlier. Its quarterly dividend is $1.42 a share.
Pharmaceutical giant Pfizer (PFE) also made the list. During the first half of this year, the company paid $4.5 billion in dividends. Its quarterly dividend is 40 cents a share.
The company’s free cash flow was $29.9 billion in 2021, up from $10.5 billion in 2019. It totaled roughly $6 billion in this year’s first quarter. Pfizer defines free cash as U.S. generally accepted accounting principles, or GAAP, net operating cash flow minus purchases of plant property and equipment.
Cisco Systems (CSCO) is the only technology company on the list. Its free cash flow yield of 7.1% was more than double the dividend yield of 3.4%. The company has said that it plans to return a minimum of 50% of its free cash annually via dividends and buybacks of its common stock.
During the first three quarters of the company’s most current fiscal year, which ended in July, the company’s free cash flow totaled $9.2 billion—down from $10.4 billion a year earlier but still sufficient to cover and grow the dividend. The company boosted its quarterly dividend to 38 cents a share, an increase of a penny, or nearly 3%.
Rounding out the list of seven companies is Northern Trust (NTRS), a large bank based in Chicago. In mid-July, the company declared a quarterly dividend of 75 cents a share, up 5 cents, for an increase of 7%.
Write to Lawrence C. Strauss at [email protected]
