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1) How do you know if the dividend is 'safe'?
The traditional payout ratio is not the way...
The classic payout ratio is simply:
Dividends Paid / Net Income
This is flawed
Companies do not pay dividends from their net income balance
The traditional payout ratio is not the way...
The classic payout ratio is simply:
Dividends Paid / Net Income
This is flawed
Companies do not pay dividends from their net income balance
2) If we want to see ๐ก๐จ๐ฐ ๐ฆ๐ฎ๐๐ก capital the company has available to spend on dividends, debt repayment, share buybacks and investments
We can find the Free Cash Flow
Which is simply Cash from Operations - Capex
We can find the Free Cash Flow
Which is simply Cash from Operations - Capex
3) Here is an excerpt from AT&T $T 's FY 19 Cash Flow Statement
They generated $48.66 Billion in Cash Flow from Ops
They spent $19.43 Billion in Capital Expenditure
Their Free Cash Flow is $29.23 Billion
They paid out $14.88 Billion in dividends that year
They generated $48.66 Billion in Cash Flow from Ops
They spent $19.43 Billion in Capital Expenditure
Their Free Cash Flow is $29.23 Billion
They paid out $14.88 Billion in dividends that year
4) So based on the FCF Payout ratio
AT&T only spent 50% of their FCF on dividend payments
If we used the Net Income payout ratio, that figure would be closer to 100%
AT&T had $29 Billion to utilize, and only $14.8 Billion was used to pay dividends
AT&T only spent 50% of their FCF on dividend payments
If we used the Net Income payout ratio, that figure would be closer to 100%
AT&T had $29 Billion to utilize, and only $14.8 Billion was used to pay dividends
5) I personally prefer to look at Free Cash Flow to Equity
Which is
CFO - Capex - Net Debt
This way, it accounts for the debt and reinvestment and shows you ONLY what is left for dividends and buybacks
Often cited as the 'potential dividend' metric
Hope that helps
Which is
CFO - Capex - Net Debt
This way, it accounts for the debt and reinvestment and shows you ONLY what is left for dividends and buybacks
Often cited as the 'potential dividend' metric
Hope that helps
6) FYI
AT&T's FCFE in 2019 was $44.6 Billion
Meaning they paid only 33% of their free cash flow to equity in dividends
$T
AT&T's FCFE in 2019 was $44.6 Billion
Meaning they paid only 33% of their free cash flow to equity in dividends
$T
