I recently received some advice from readers of what they want to see in my Dividend Stock Tracker. I do take their advice seriously under considerations but I would like to take things one step at a time to improve it.
The objective of the tracker still remains as an accessible page to track all Blue Chip and Large Dividend Yielding Stocks on the SGX.
I try to incorporate what I think are important indicators to good dividend companies and one of the things that I am not too pleased with the old Tracker was the use of Net Operating Cashflow (NOPAT).
I wrote in the past on what is the difference between Operating Cashflow, EBITDA, Earnings and Free Cashflow. For readers who want to know in depth about this can view the article here.
Why use Free Cashflow
In the past when I use operating cashflow, it is a good indicator of how much hard cash the company was bringing in. However, the cash brought in is not just to pay dividends but
- To buy plants and equpiments or replace them as capital expenditure (CAPEX)
- Pay off existing debts
- Payout as dividends
- Retain as cash in company
Comparing Operating Cashflow Yield vs Dividend Yield is not a good reflection as most company (other than REITs) have a level of CAPEX.
Only after paying for CAPEX do we know how much “free” cash the company have to maneuver.
So essentially Free Cashflow (FCF) = Operating CF – CAPEX
So how do we use it? For me I use it
- as a starting indication of whether a company is paying out more dividends then they are bringing in.
- to find companies with good free cashflow growth rate. Take a look at companyes like Google and Microsoft.
Case Study: VICOM and SPH
Both these stocks provide a nice dividend yield on my dividend stock tracker. VICOM at 4.5% and SPH at 6.3%.
So if we are looking for yield then of course we would choose SPH right?
Vicom’s cashflow after taking into consideration capital expenditure is 7.2%. This means that if they don’t want to retain cash or pay off debt level, they can actually pay out 7.2% dividend yield based on how much they earn.
They even have a low payout ratio at 42% ( A note: my payout ratio is payout of operating cashflow instead of net income)
SPH on the other hand have a free cashflow yield of 5.1%. This means that it is paying out more than its earned after factoring capex.
So where did the 6.3%-5.1% = 1.2% yield come from? That, for a company can come from
- Existing Cash Holdings ( See Balance Sheet)
- Take on more debts ( See Cashflow Statement under Financing)
Its payout ratio is high at 115% as well.
If you ask me, I would say Vicom looks the safer dividend since it has been operating within its capital structure better.
With this in place, you can see a lot of stocks on the stock tracker with red free cashflow. what does this mean? If the dividend payout is more than free cashflow, its flaged as red in color.
There are even companies with negative free cashflow like SP Ausnet.
Hope this is helpful.
I run a free Singapore Dividend Stock Tracker available for everyone’s perusal. It contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly here.