The Importance of Understanding Stock Dividends
Understanding Stock Dividends
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Lets just look at the dividend forecast of several stocks here:
Of the nearly 1,000 stocks covered by Safety Net Pro, dividend safety rating system, 242 stocks have an F grade, which means there is a high likelihood of a dividend cut. There are many factors that go into the ratings, but an F usually means the company does not generate enough cash flow.
Let’s look at a few…
In 2016, Fastenal’s (Nasdaq: FAST) free cash flow was $325 million while it paid shareholders $347 million in dividends.
If the company isn’t able to get its free cash flow back above its dividend in 2017, management may have some tough decisions to make.
Last year, Cracker Barrel Old Country Store Inc. (Nasdaq: CBRL) generated only $157 million in free cash flow. It paid $256 million in dividends.
This year, free cash flow is forecast to decline all the way to $104 million. If the company is going to sustain its dividend, it will have to borrow money or take cash out of the bank to pay it.
And L Brands (NYSE: LB), the owner of Victoria’s Secret, had only $900 million in free cash flow, yet it paid shareholders nearly $1.3 billion in dividends. Free cash flow isn’t expected to be above $1 billion for the next four years.
I’ll tell you what Victoria’s Secret really is: She can’t afford the dividend she’s paying.
Understanding cash flow is crucial to running a business and to analyzing a stock.
If you’re an income investor, you can’t afford to be unaware of whether your company’s cash flow will result in a dividend cut.
Otherwise, you could see a drop in your own cash flow.
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