Published Thu, 17 Jan 2019 12:41:45 -0500 on Seeking Alpha
Image source: Valuentum
By Valuentum Analysts
We believe that assessing the forward-looking free-cash-flow and balance-sheet dynamics of a business, in conjunction with the firm's dividend payout ratio and other items, is a more reasonable approach in determining whether a firm has the capacity to continue paying and growing dividends than the dividend payout ratio alone. This line of thinking has led us to develop the forward-looking Valuentum Dividend Cushion ratio. The Dividend Cushion measure is a ratio that sums the existing net cash (total cash less total debt) a company has on hand (on its balance sheet) plus its expected future free cash flows (cash from operations less all capital expenditures) over the next five years and divides that sum by future expected cash dividends (including expected growth in them, where applicable) over the same time period.
Basically, if the ratio is significantly above 1, the company has financial capacity to pay out its expected future dividends, by our estimates. The higher the ratio, the better, all else equal. An elevated ratio doesn't ensure the company will keep paying dividends, however, as management's willingness to do so is another key consideration, but the ratio acts as a logical, cash-flow based ranking of dividend health, much like a corporate credit rating, for example, ranks a company's ability to pay back debt (default risk).
Income investors generally would like to see a Dividend Cushion ratio... Read more
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