The best investors have a process. Masters of the Market: featuring Alex Green

0.00  Intro

2.14  What did you learn from your career

6.54  Investing is a long game

9.41  The best investors have a process

12.45 Smart money in hedge funds

14.18 Is Wall Street trustworthy

18,13  How to deal with fear

23.30  How to pick stocks

28.39  How to judge management

30.14  How to build a portfolio

34.02  Do dividends matter

37.05  What are we missing

39.13  Option oriented ETFs

41.40  Trends investors are overlooked

48.15  Small Cap Stocks

51.29  Biggest Mistakes

56.14  My Biggest Mistake

57.54  Top 3 Positions

Checking the safety of dividend payments

Dividends are an important part of total returns from owning a share.  

Dividends are a cash payment and therefore the company needs to have enough cash flow to make these payments.

Compare the FCF with its dividends

By comparing the free cash flow with its dividends, you can see whether a company has sufficient cash to pay dividends.  

Net cash from operation - CAPEX =  Free Cash Flow

You want to see the free cash flow being the bigger number more often than not.

When dividend is the larger number compared to the free cash flow, this may occur when a company is putting cash to good use (capex).  When dividend  is the larger number is fine on occasional years.  Prolonged periods of insufficient free cash flow will often lead to dividends being cut or scrapped eventually.

When analysing a company, it is often a good idea to compare free cash flow with the dividends over a period of ten years.

FCF dividend cover

A quick way to check whether cash flow is sufficient to pay dividends is by using the free cash flow dividend cover ratio.   This is calculated as follows:

Free Cash Flow dividend cover =  Free cash flow / dividends.

When free cash flow exceeds the dividends by a big margin, it can be a sign that the company may be capable of paying a much bigger dividend in the future.

How and Why Do Companies Pay Dividends?

An important part missing in many of these discussions 

• is the purpose of dividends and 
• why they are used by some companies and not by others.  

Let's look at different arguments for and against dividends policies. 

Arguments Against Dividends

1.  First, some financial analysts feel that the consideration of a dividend policy is irrelevant because investors have the ability to create "homemade" dividends. 

These analysts claim that this income is achieved by individuals adjusting their personal portfolios to reflect their own preferences. For example, investors looking for a steady stream of income are more likely to invest in bonds (in which interest payments don't change), rather than a dividend-paying stock (in which value can fluctuate). Because their interest payments won't change, those who own bonds don't care about a particular company's dividend policy.

2.  The second argument claims that little to no dividend payout is more favorable for investors. 

Supporters of this policy point out that taxation on a dividend is higher than on a capital gain. The argument against dividends is based on the belief that a firm that reinvests funds (rather than paying them out as dividends) will increase the value of the firm as a whole and consequently increase the market value of the stock.

According to the proponents of the no dividend policy, a company's alternatives to paying out excess cash as dividends are the following: 

• undertaking more projects, 
• repurchasing the company's own shares, 
• acquiring new companies and 
• profitable assets, and reinvesting in financial assets. 

Arguments For Dividends

In opposition to these two arguments is the idea that a high dividend payout is important for investors because:

1.  dividends provide certainty about the company's financial well-being; 

2.  dividends are also attractive for investors looking to secure current income. 

In addition, there are many examples of how the decrease and increase of a dividend distribution can affect the price of a security.

• Companies that have a long-standing history of stable dividend payouts would be negatively affected by lowering or omitting dividend distributions; these companies would be positively affected by increasing dividend payouts or making additional payouts of the same dividends.
• Furthermore, companies without a dividend history are generally viewed favorably when they declare new dividends. 

Dividend-Paying Methods

Should the company decide to follow either the high or low dividend method, it would use one of three main approaches: 

• residual, 
• stability, or 
• a hybrid compromise between the two.

Residual

Companies using the residual dividend policy choose to rely on internally generated equity to finance any new projects. As a result, dividend payments can come out of the residual or leftover equity only after all project capital requirements are met. These companies usually attempt to maintain balance in their debt/equity ratios before making any dividend distributions, which demonstrates that they decide on dividends only if there is enough money left over after all operating and expansion expenses are met.

For example, let's suppose that a company named CBC has recently earned $1,000 and has a strict policy to maintain a debt/equity ratio of 0.5 (one part debt to every two parts of equity).

• Now, suppose this company has a project with a capital requirement of $900. In order to maintain the debt/equity ratio of 0.5, CBC would have to pay for one-third of this project by using debt ($300) and two-thirds ($600) by using equity. In other words, the company would have to borrow $300 and use $600 of its equity to maintain the 0.5 ratio, leaving a residual amount of $400 ($1,000 - $600) for dividends. 
• On the other hand, if the project had a capital requirement of $1,500, the debt requirement would be $500 and the equity requirement would be $1,000, leaving zero ($1,000 - $1,000) for dividends. If any project required an equity portion that was greater than the company's available levels, the company would issue new stock.

Stability

The fluctuation of dividends created by the residual policy significantly contrasts with the certainty of the dividend stability policy. 

With the stability policy, companies 

• may choose a cyclical policy that sets dividends at a fixed fraction of quarterly earnings, or 
• it may choose a stable policy whereby quarterly dividends are set at a fraction of yearly earnings. 

In either case, the aim of the dividend stability policy is to reduce uncertainty for investors and to provide them with income.

Suppose our imaginary company, CBC, earned the $1,000 for the year (with quarterly earnings of $300, $200, $100, $400). 

• If CBC decided on a stable policy of 10% of yearly earnings ($1,000 x 10%), it would pay $25 ($100/4) to shareholders every quarter. 
• Alternatively, if CBC decided on a cyclical policy, the dividend payments would adjust every quarter to be $30, $20, $10 and $40 respectively. 

In either instance, companies following this policy are always attempting to share earnings with shareholders rather than searching for projects in which to invest excess cash.

Hybrid

The final approach is a combination between the residual and stable dividend policy. Using this approach, companies tend to view the debt/equity ratio as a long-term rather than a short-term goal. In today's markets, this approach is commonly used by companies that pay dividends. 

• As these companies will generally experience business cycle fluctuations, they will generally have one set dividend, which is set as a relatively small portion of yearly income and can be easily maintained. 
• On top of this set dividend, these companies will offer another extra dividend paid only when income exceeds general levels.

Conclusion

If a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments will be for investors - and how stable the income.


http://investopedia.com/articles/03/011703.asp?partner=basics4bb

Malaysia's richest tycoons and the billions in dividends they earned in the final quarter of 2020

 Bees for the honey

Cows for the milk

And, stocks for the dividends!

KUALA LUMPUR (March 18): Eight of Malaysia's top 10 richest tycoons — based on Forbes' 2020 billionaires list — earned a whopping RM1.99 billion worth of dividends from the recently announced financial results for the quarter ended Dec 31, 2020, based on their known shareholdings in Bursa Malaysia-listed firms.

Among them, Public Bank Bhd founder Tan Sri Dr Teh Hong Piow is expected to receive the biggest dividend payout totalling RM668.18 million from his shareholdings in the bank and insurer LPI Capital Bhd.

Public Bank, the third largest banking group in the country by asset size, declared an interim dividend of 13 sen (payable on March 22) for its fourth quarter of financial year 2020 (4QFY20) ended Dec 31, 2020. Public Bank also undertook a four-for-one bonus share issue to reward shareholders last year, which enlarged the number of Public Bank's outstanding shares to 4.2 billion.

Teh holds a 22.78% stake in Public Bank through his private investment vehicle — Consolidated Teh Holdings Sdn Bhd. He has another direct stake of 0.64%.

LPI Capital, meanwhile, announced a second interim dividend of 44 sen per share for its 4QFY20, which amounted to a payout of RM175.3 million. Based on Teh's 44.15% stake in the company, his share of the dividend payout will be about RM77.39 million.

After Teh is Hong Leong Group's Tan Sri Quek Leng Chan, who is estimated to get RM296.05 million worth of dividends through his holdings in Hong Leong Financial Group Bhd (HLFG) and Hong Leong Bank Bhd (HLB).

HLFG declared an interim dividend of 10.8 sen per share while HLB announced an interim single-tier dividend of 14.78 sen per share. Quek holds a direct interest of 0.47% and an indirect interest of 77.88% in HLFG, while he controls an indirect interest of 64.51% in HLB.

Next is telecommunications tycoon T Ananda Krishnan, who will receive RM276.04 million from his stake in Maxis Bhd and Astro Malaysia Holdings Bhd. Ananda is the largest shareholder in Maxis with an indirectly held 62.34% stake. In Astro, he holds an indirect stake of 41.29%.

Maxis declared a fourth interim dividend of five sen per share in its 4QFY20 ended Dec 31, 2020, while Astro announced a payout of 1.5 sen per share in its 3QFY20 ended Oct 31, 2020.

Ananda also holds a 34.86% stake in Bumi Armada Bhd, Asia's biggest offshore supporting vessel operator. The company, however, did not declare any dividends in 2020.

Robert Kuok's dividend cheque from PPB Group Bhd for the final quarter of last year is estimated to be RM274.65 million — the fourth highest sum among the ultra-rich.

PPB Group announced a dividend of 38 sen, comprising a final dividend of 22 sen and a special payout of 16 sen, in its 4QFY20 ended Dec 31, 2020. Kuok holds a 50.81% stake in the diversified conglomerate through his private investment vehicle, Kuok Brothers Sdn Bhd. He also holds a stake in Shangri-La Hotels (Malaysia) Bhd, though the latter did not declare any dividends for its FY20.

The fifth largest dividend gainer among the top 10 Malaysian billionaires is the founder and chairman of Hartalega Holdings Bhd, Kuan Kam Hon, who received RM162.47 million from the rubber glove maker, which recently announced a record high net profit of RM1 billion, and a second interim dividend of 9.65 sen for its 3QFY21 ended Dec 31, 2020, which was paid in February.

Based on the latest bourse filings, Kuan holds a direct interest of 0.795% in the group and a 48.32% indirect interest via Hartalega Industries Sdn Bhd. The glove manufacturer recently announced a record high net profit of RM1 billion for its 3QFY21 ended Dec 31, 2020 and declared a second interim dividend of 9.65 sen.

Next comes gaming tycoon Tan Sri Lim Kok Thay, who likely earned RM148.73 million in dividends from his shareholdings in the Genting group of companies listed on Bursa, despite the group facing challenges in operating its casino and resorts amid the pandemic.

This is based on the RM146.54 million Genting Bhd paid to Kok Thay's private investment company, Kien Huat Realty Sdn Bhd, and the dividends declared by Genting Plantations Bhd and Genting Malaysia Bhd.

Genting Malaysia declared a dividend payout of 8.5 sen per share for its 4QFY20 ended Dec 31, 2020, while Genting Plantations announced a 15 sen dividend — comprising a final dividend of four sen per share and a special dividend of 11 sen per share.

Kok Thay holds a direct interest of 0.44% in Genting Malaysia and a direct interest of 0.05% in Genting Plantations.

After Kok Thay is Datuk Lee Yeow Chor, who earned RM141.28 million in dividends from his holding in IOI Corp Bhd. Lee holds a direct interest of 0.16% and an indirect interest of 49.94% in the group.

Meanwhile, Press Metal Aluminium Holdings Bhd's Tan Sri Koon Poh Keong garnered RM20.22 million through his holdings in Press Metal and PMB Technology Bhd. Press Metal declared a fourth interim single-tier dividend of 1.25 sen per share in its 4QFY20 ended Dec 31, 2020 while PMB Technology declared a one sen dividend to its shareholders.

Two of the top 10 tycoons, however, did not appear to have gained any dividend payments from their shareholdings in Bursa-listed companies. They are gaming tycoon Tan Sri Chen Lip Keong and Tan Sri Lau Cho Kun, the largest shareholder in Hap Seng Consolidated Bhd.

What the glove maker billionaires take home

Though not on the list of Malaysia's top 10 richest tycoons based on Forbes 2020 list — which was published in March 2020 — Top Glove Corp Bhd's founder and executive chairman Tan Sri Dr Lim Wee Chai earned about RM460.45 million in dividend in end-2020, thanks to the interim dividend of 16.5 sen that the world's largest rubber glove maker declared in its 1QFY21 ended Nov 30, 2020.

The group also announced an interim dividend payment of 25.2 sen per share for its 2QFY21 ended Feb 28, 2021, payable on April 6 this year. Based on the announcement, Wee Chai stands to gain another dividend payout of RM710.12 million before mid-2021.

That means just for the first two quarters of Top Glove's FY21, Wee Chai has accumulated a total of RM1.17 billion in dividends, based on his total shareholdings of 35.22% in Top Glove, comprising a direct stake of 26.56% and an indirectly held stake of 8.65%.

Datuk Seri Stanley Thai of Supermax Corp Bhd, on the other hand, accumulated dividends of RM38.17 million, while Tan Sri Lim Kuang Sia of Kossan Rubber Industries Bhd earned RM132.99 million.

Including Kwan, the billionaires from the big four glove makers on Bursa earned RM794.07 million worth of dividends in end-2020, as their companies' earnings continued to scale new highs following the surge in glove demand amid the Covid-19 outbreak.

 

https://www.theedgemarkets.com/article/malaysias-richest-tycoons-and-billions-dividends-they-earned-final-quarter-2020

What dictates dividend policy?

Management determines if it is going to 

• distribute earnings in the form of a dividend or 
• reinvest all earnings to further the business plan of the company. 

The ratio of dividends paid out to investors versus the amount of earnings retained is called the payout ratio.  

The Dividend Decision

Changes in tax law and investor preference can influence decisions in the corporate boardroom regarding how much profit to retain or to pay out to investors in the form of dividends.  

However, dividend increases often lag behind an increase in earnings because management will want to be certain that a new higher dividend payment will be sustainable going forward.

Change in Dividend Yield has a lot to do with change in Share Price

Looking back over market history, we can see that dividend policy and payouts have remained relatively steady and that any change in dividend yield has had a lot more to do with the change in stock prices than with changes to dividend policy made by corporate directors.  (Note:  You can 'price' your stocks by looking at historical dividend yields.)




A cut in dividends is often perceived negatively

Management is usually very reluctant to reduce dividends because a cut is often perceived as a sign of financial weakness.  

Even during the Great Depression, companies were loath to cut dividends.  

• From 1929 to 1932, dividend yields soared because most companies maintained their dividends as stock prices collapsed in the crash.  
• But, as stock prices rose from 1933 to 1936, dividend yields fell - even though companies were actually increasing the dividends they paid.

This inverse relationship between dividend yield and price was really evident during the huge bull market run from 1982 to 1999.  

• Companies increased dividends steadily over the period, actually increasing dividends paid by almost 400 percent.  
• Yet the dividend yield collapsed to historic lows because stock prices increased by 1,500 per cent.

Some companies do run into trouble and cut or omit their dividend payments, but this is the exception rather than the rule. 



The typical dividend-paying company

The typical dividend-paying company not only maintains the dividend payout it establishes, but follows a policy of steadily increasing its dividend as earnings increase. 

Some companies increase their dividend payments 

• (1) every quarter, 
• (2) some once per year, and 
• (3) others only as profits allow.

Some companies will even pay extra or special dividends if earnings have been quite good for a number of years.


Dividend policy

Many established public companies pay cash dividends and have a dividend policy that is well known to their investors.  

Some of them have been paying cash dividends for a very long time.

What I’ve Learned After Making More Than 5-Figures In Dividends

What I’ve Learned After Making More Than 5-Figures In Dividends

By The Fifth Person on December 28, 2015

As investors, we all love dividends. Other than the thrill of seeing a stock you own rise higher and higher in the stock market, receiving passive dividend income from your investments every year is something we all look forward to.

So if you’re more of an income investor and looking to invest for dividends, your stock portfolio will be markedly different from someone who’s investing for high growth and capital gain. The stocks that will give good, consistent dividends may not necessarily be the kind that will grow by 20-50% a year and vice versa.

So if you investing for dividends, you have to invest accordingly and only pick the best stocks that will give the passive dividend income you want. The question is: How?

Over the years, our investments have received more than 5-figures in dividends. So if you’re slightly lost and looking for some direction, here are 7 quick steps that we personally use to pick the best dividend stocks around: (Hint: You can’t just look at dividend yield alone!)



#1 Look for Mid-Large Cap Stocks

The best dividend stocks are usually large, mature companies with stable revenue, profits and cash flow. These companies have little growth left in them. Because these companies are no longer expanding aggressively, the majority of their earnings can be returned to shareholders as dividends.

On the other hand, a smaller, high-growth company needs more cash and resources to grow and expand its business, leaving less money to pay shareholders dividends (if any).


#2 Dividend Payout Ratio is 50% or More

If a company is large, stable and isn’t seeking to grow aggressively any more, then the majority of the profits it makes should be returned to shareholders. So look for a company with a dividend payout ratio of at least 50% or more. For example, Nestlé (Malaysia) returns over 90% of its earnings to shareholders as dividends.

If a company has a low payout ratio, ask yourself why the company is holding on to the cash. Unless they have a good reason to do so or have a way to generate exceptional returns for shareholders, the majority of profits should be paid out as dividends.



#3 Track Record of Paying Consistent Dividends

The company should have a long and stable track record of paying consistent/growing dividends to shareholders. No point if a company is large and successful and has profits to distribute as dividends, but chooses to pay them out inconsistently.

The best track record is to see a company pay a consistently growing dividend over the last 5-10 years. This shows that as the company grows more and more successful, the management is also willing to share the fruits of its labour with its shareholders.


#4 Company’s Fundamentals Must Be Sustainable

Many dividend investors tend to ignore the overall aspects of a company’s fundamentals and primarily focus on the amount of dividends they can receive from an investment. While dividend yield is obviously important for someone seeking dividends, it is also important to consider the overall health of the company.

A company with deteriorating fundamentals (e.g. falling revenue, profits, cash flow, fading economic moat, etc.) cannot sustain its dividend payout in the long term. The less revenue and profit it makes, the less dividends it can pay.

Furthermore, a company with falling revenues and profits will see its stock price fall in tandem over time as investors start to realize the company is no longer performing as well. This fall in value will eat into any dividend gains you might have had at the start — leaving you back at square one.

So always make sure the dividend company you want to invest in will remain fundamentally strong and robust for many years to come.



#5 Company has Low CAPEX

As a dividend investor, you prefer to invest in a company with low capital expenditure (CAPEX). A company with high CAPEX means that it has to continually reinvest its profits in maintaining its business operations, leaving less to distribute as dividends.

For example, airlines have very high CAPEX as they need to continually maintain their aircraft and upgrade them to newer models after a certain amount of years.

So look for a company that’s able to maintain/grow its business with minimal CAPEX.

If you want help, you can always kick start the idea by downloading our watchlist of dividend paying stocks below:


#6 Company has Stable Free Cash Flow

Ultimately, a company must have real cash (not just profits) to be able to pay dividends to its shareholders. Even if a company is profitable but has negative or inconsistent free cash flow, it will have trouble paying stable dividends.

A smaller company that is seeking to grow might have negative free cash flow as it expands its business. But a large, stable company that dominates its industry should be producing high amounts of free cash flow year after year.



#7 Yield Must Beat Risk-Free Rate

The dividend yield you receive from a stock should beat the risk-free rate of the country you reside in. The risk-free rate is the lowest return you can theoretically get “risk-free”over a period of time.

In the US, if you plan to invest your money for ten years, then the risk-free rate is usually based on the return of the 10-year US Treasury note which is currently around 2.30%. In Malaysia, the risk-free rate is usually based on the guaranteed interest your EPF gives you which is 2.5%. However, since 2000, EPF has been able to give out between 4.25% to 6.75%, which is more than the minimal guaranteed.

If your dividend yield can’t beat your risk-free rate, you might as well put your money with the US Treasury / EPF since you face less risk investing in a US Treasury note / EPF than investing in a stock to generate the same returns.



The Fifth’s Perspective

There you have it! Seven quick steps to help you pick the best dividend stocks to invest in. As you can see, there are lots more items to consider other than just dividend yield!

So remember to check these seven criteria whenever you’re looking to invest for dividends.


https://fifthperson.com/what-ive-learned-after-making-more-than-5-figures-in-dividends/

Capital Structure, Dividends and Share Repurchases

There is usually more to lose than to gain when making a decision in this area.

Managers should manage capital structure with the goal of not destroying value as opposed to trying to create value.

There are three components of a company's financial decisions:

1. how much to invest,
2. how much debt to have, and 
3. how much cash to return to shareholders.

Choices concerning capital structure

Managers have many choices concerning capital structure, for example,

1. using equity,
2. straight debt,
3. convertibles and
4. off-balance-sheet financing.

Managers can create value from using tools other than equity and straight debt under only a few conditions.

Even when using more exotic forms of financing like convertibles and preferred stock, fundamentally it is a choice between debt and equity.




Debt and Equity Financial Choices trade-offs

Managers must recognise the many trade-offs to both the firm and investors when choosing between debt and equity financing.

The firm increases risk but saves on taxes by using debt; however, investing in debt rather than equity probably increases the tax liability to investors.

Debt has been shown to impose a discipline on managers and discourage over investment, but it can also lead to business erosion and bankruptcy.

Higher debt increases the conflicts among the stakeholders.




Credit rating is a useful indicator of capital structure health

Most companies choose a capital structure that gives them a credit rating between BBB- and A+, which indicates these are effective ratings and capital structure does not have a large effect on value in most cases.

The capital structure can make a difference for companies at the far end of the coverage spectrum.

Credit ratings

• are a useful summary indicator of capital structure health and 
• are a means of communicating information to shareholders.

The two main determinants of credit ratings are

• size and 
• interest coverage.

Two important coverage ratios are

• the EBITA to interest ratio and 
• the debt to EBITA ratio.

The former is a short-term measure, and the latter is more useful for long-term planning.




Methods to manage capital structure

Managers must weight the benefits of managing capital structure against

• the costs of the choices and 
• the possible signals the choices send to investors.

Methods to manage capital structure include

• changing the dividends, 
• issuing and buying back equity, and
• issuing and paying off debt

When designing a long-term capital structure, the firm should

• project surpluses and deficits, 
• develop a target capital structure, and 
• decide on tactical measures.  

The tactical, short-term tools include

• changing the dividend,
• repurchasing shares, and 
• paying an extraordinary dividend.

Return Characteristics of Equity Securities

The two main sources of an equity security's total return are:

• Capital gains from price appreciation
• Dividend income

The total return on non-dividend paying stocks only consists of capital gains.

Investors in depository receipts and foreign shares also incur foreign exchange gains (or losses).

Another source of return arises from the compounding effects of reinvested dividends.

Dividend per share

For example;

Total dividends  $2 million
Number of issued shares  10 million
Dividend per share  20 sen.

This is the total dividends for the year divided by the number of shares in issue.

Any preference shares are normally disregarded.

Dividends, Dividend Yield and Bond Yield

Dividends can help to mitigate risk. When buying a dividend stock, the quality of the company is the number one consideration.

Let's assume that the stock stays the same or, even worse, actually goes down a little in the short term.

• If you have invested in a business that does not pay any dividends, you have no compensation for what has happened, just less money than you had when you invested.
• However, if the business pays dividends and continues to honour that commitment (in the same way that companies like Coca Cola have historically done) then it mitigates some of your risk.  

Or to put it another way, you still get some income from the investment which could be seen to offset your loss in the share price, should that have happened.

As a general principle, I tend to invest only in businesses that have a sustained track record of paying dividends.

"When buying a dividend stock, the quality of the company is the number one consideration.  Given enough time, a quality company will always rise above lesser competition.  When your holding period is forever, it is inevitable that a superior stock will eventually out-perform second-tier players."  -  Warren Buffett

In an ideal situation, you will buy a share in a business which is undervalued, and over time the share will increase in value to the point at which you are very pleased with the capital gain you have seen in the share price.  Then guess what, you also receive a cash bonus in the form of a dividend payment!  Sounds like a great concept to me.  :-)

A practical analysis of dividend

A Practical Analysis Of Unilever Plc's Dividend

By Royston Wild | Fool.co.uk

The ability to calculate the reliability of dividends is absolutely crucial for investors, not only for evaluating the income generated from your portfolio, but also to avoid a share-price collapse from stocks where payouts are slashed.

There are a variety of ways to judge future dividends, and today I am looking at Unilever (NYSE: UL - news) to see whether the firm looks a safe bet to produce dependable payouts.

Forward dividend cover

Forward dividend cover is one of the most simple ways to evaluate future payouts, as the ratio reveals how many times the projected dividend per share is covered by earnings per share. It can be calculated using the following formula:

Forward earnings per share ÷ forward dividend per share

Unilever is expected to provide a dividend of 88.8p per share in 2013, according to City numbers, with earnings per share predicted to register at 139.1p. The widely-regarded safety benchmark for dividend cover is set at 2 times prospective earnings, but Unilever falls short of this measure at 1.6 times.

Free cash flow

Free cash flow is essentially how much cash has been generated after all costs and can often differ from reported profits. Theoretically, a company generating shedloads of cash is in a better position to reward stakeholders with plump dividends. The figure can be calculated by the following calculation:

Operating profit + depreciation & amortisation - tax - capital expenditure - working capital increase

Free cash flow increased to €5.14bn in 2012, up from €3.69bn in 2011. This was mainly helped by an upswing in operating profit -- this advanced to €7bn last year from ?6.43bn in 2011 -- and a vast improvement in working capital.

Financial gearing

This ratio is used to gauge the level debt a company carries. Simply put, the higher the amount, the more difficult it may be to generate lucrative dividends for shareholders. It can be calculated using the following calculation:

Short- and long-term debts + pension liabilities - cash & cash equivalents

___________________________________________________________            x 100

                                      Shareholder funds

Unilever's gearing ratio for 2012 came in at 56.6%, down from 59.5% in the previous 12 months. The firm was helped by a decline in net debt, to €7.36bn from €8.78bn, even though pension liabilities edged higher. Even a large decline in cash and cash equivalents, to €2.47bn from €3.48bn, failed to derail the year-on-year improvement.

Buybacks and other spare cash

Here, I'm looking at the amount of cash recently spent on share buybacks, repayments of debt and other activities that suggest the company may in future have more cash to spend on dividends.

Unilever does not currently operate a share repurchase programme, although it remains open to committing capital to expand its operations around the globe. Indeed, the company is attempting to ratchet onto excellent growth in developing regions as consumer spending in the West stagnates -- the firm saw emerging market sales rise 10.4% in quarter one versus a 1.9% fall in developed regions.

The firm remains dogged in its attempts to acquire a 75% stake in India's Hindustan Unilever (BSE: HUL.BO - news) , for example, and I expect further activity to materialise in the near future. Meanwhile, Unilever is looking to reduce its exposure to stagnating markets by divesting assets, exemplified by the recent sale of its US frozen foods business.

An appetising long-term pick

Unilever's projected dividend yield for 2013 is bang in line with the FTSE 100 (FTSE: ^FTSE - news) average of 3.3%. So for those seeking above-par dividend returns for the near-term, better prospects can be found elsewhere. Still, the above metrics suggest that the firm's financial position is solid enough to support continued annual dividend growth.

And I believe that Unilever is in a strong position to grow earnings strongly, and with it shareholder payouts, further out. Galloping trade in developing markets, helped by the strength of its brands -- the company currently boasts 14 '€1 billion brands' across the consumer goods and food sectors -- should significantly bolster sales growth and thus dividend potential in my opinion.

Tune in to hot stocks growth

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> Royston does not own shares in Unilever. The Motley Fool has recommended shares in Unilever.

http://uk.finance.yahoo.com/news/practical-analysis-unilever-plcs-dividend-090040474.html

Stock valuation. Why does the value of a share of stocks depend on dividends?

Does the value of stocks depend on dividends or earnings?

Management determines its dividend policy by evaluating many factors, including:

• the tax differences between dividend income and capital gains,
• the need to generate internal funds to retire debt or invest, and,
• the desire to keep dividends relatively constant in the face of fluctuating earnings.

Since the price of a stock depends primarily on the present discounted value of all expected future dividends, it appers that dividend policy is crucial to determining the value of the stock.

However, this is not generally true. It does not matter how much is paid as dividends and how much is reinvested AS LONG AS the firm earns the same return on its retained earnings that shareholders demand on its stock. The reason for this is that dividends not paid today are reinvested by the firm and paid as even larger dividends in the future.

Dividend Payout Ratio

Management's choice of dividend payout ratio, which is the ratio of cash dividends to total earnings, does influence the timing of the dividend payments. 

The lower the dividend payout ratio (that is more earnings are retained), the smaller the dividends will be in the near future. Over time, however, dividends will rise and eventually will exceed the dividend path associated with a higher payout ratio.

Moreover, assuming that the firm earns the same rate on investment as the investors require from its equity (for example, ROE of 15%), the present value of these dividend streams will be identical no matter what payout ratio is chosen.

How to value Stocks?

Note that the price of the stock is always equal to the present value of ALL FUTURE DIVIDENDS and not the present value of future earnings. 

Earnings not paid to investors can have value only if they are paid as dividends or other cash disbursements at a later date. Valuing stock as the present discounted value of future earnings is manifestly wrong and greatly overstates the value of a firm. (Note: Firms that pay no dividends, such as Warren Buffett's Berkshire Hathaway, have value because their assets, which earn cash returns, can be liquidated and disbursed to shareholders in the future.)

John Burr Williams, one of the greatest investment analysts of the early part of the centrury and author of the classic The Theory of Investment Value, argued this point persuasively in 1938. He wrote: 

"Most people will object at once to the foregoing formula for valuing stocks by saying that it should use the present worth of future earnings, not future dividends. But should not earnings and dividends both give the same answer under the implicit assumptions of our critics? If earnings not paid out in dividends aree all successfully reinvested at compound interest for the benefit of the stockholder, as the critics imply, then these earnings should produce dividends later; if not, then they are money lost. Earnings are only a means to an end, and the means should not be mistaken for the end."


Ref: Stock for the Long Run, by Jeremy Siegel

http://myinvestingnotes.blogspot.com/2009/05/does-value-of-stocks-depend-on.html

Using PEG ratio: Not all growth is created equal.

As the risk increases, the PEG ratio of a firm decreases. When comparing the PEG ratios of firms with different risk levels, even within the same sector, the riskier firms should have lower PEG ratios than safer firms.

Not all growth is created equal. A firm that is able to grow at 20% a year, while paying out 50% of its earnings to stockholders, has higher quality growth than another firm with the same growth rate that reinvests all of its earnings back. Thus, the PEG ratio should increase as the payout ratio increases, for any given growth rate.

As with the PE ratio, the PEG ratio is used to compare the valuations of firms that are in the same business.  The PEG ratio is a function of:

• the risk,
• growth potential and
• the payout ratio of a firm.

http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf

http://myinvestingnotes.blogspot.com/2009/11/using-peg-ratio-not-all-growth-is.html

Words of Wisdom on Dividend Policy From Big Tesco Backer Warren Buffett

By G. A. Chester 

March 7, 2013 

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If you're a U.K. investor just starting out, U.S. investing legend Buffett may be new to you -- perhaps your interest in the man has been piqued by reading about how he's taken a big stake in Tesco  (LSE: TSCO  ) (NASDAQOTH:TSCDY  ) .LONDON -- Last week, Berkshire Hathaway  (NYSE: BRK-A  ) (NYSE: BRK-B  ) boss Warren Buffett released his annual letter to shareholders.

I can tell you that Buffett's annual letters never fail to educate, amuse, and enrich. You'll find abundant pearls of wisdom in his witty, colourful, and incisive commentaries -- as, indeed, will old hands.

586,817% and countingLet's start with why Buffett has captured the attention of millions of investors around the world. The bottom line is, his Berkshire Hathaway group has an outstanding record of increasing shareholder value over the best part of five decades.

Between 1965 and 2012, Berkshire's book value per share has increased by a mind-boggling 586,817%, representing a compound annual growth rate of close to 20%. Such gains over such a long period are unparalleled.

Successful businessesBuffett's strategy of wealth creation for Berkshire is something ordinary investors like us can learn from in weighing up companies we may want to invest in.

Successful businesses generate cash. Buffett is clear about what a company should do with that cash, in the following order of priority:

• First, examine reinvestment possibilities offered by its current business for increasing the competitive advantage over rivals.
• Second, look at acquisitions that are likely to make shareholders wealthier on a per-share basis than they were prior to the acquisition.
• Third, consider repurchasing the company's own shares to enhance each investor's share of future earnings.
• Fourth, by default, pay dividends to shareholders.

Reinvestment and acquisitionsBy reinvestment in the business, Buffett is referring to spending on projects "to become more efficient, expand territorially, extend and improve product lines or to otherwise widen the economic moat separating the company from its competitors."

When we, ourselves, are considering companies to invest in, we can check how intelligently management is reinvesting in the business by looking at such things as whether market share is being maintained/increased, and whether margins are being maintained/grown relative to rivals.

Buffett considers small bolt-on acquisitions that can easily be integrated into existing operations as part of the reinvestment in the business. The acquisitions referred to in stage two of his four steps are those that add something new to the company -- some form of diversification.

When we are considering companies to invest in, we can check whether management has a good track record of adding shareholder value through making such acquisitions.

Repurchasing sharesBuffett is strict about when it's right for a company to repurchase its own shares. Again and again over the years, he has stressed that the only time to do share buybacks is when the shares are available "far below," "well below," or "at a meaningful discount from" intrinsic value -- and "conservatively calculated" intrinsic value at that.

Last year, Berkshire spent $1.3bn repurchasing its own shares. At the moment, Buffett is prepared to pay up to 120% of Berkshire's book value for the shares.

So, if you're interested in buying shares in Berkshire yourself, you have it from the horse's mouth that 120% of book value represents a meaningful discount to conservatively calculated intrinsic value at the present time.

DividendsBerkshire doesn't pay dividends, but not because Buffett is against them per se. It's simply that he has always seen opportunities in steps one to three for employing Berkshire's cash flows more fruitfully for shareholders.

At the moment, the discount to intrinsic value is such that share buybacks are an efficient way for Berkshire to employ excess cash, but Buffett says that if things change materially "we will re-examine our actions."

Buffett is perfectly happy for the quoted companies in Berkshire's portfolio -- American Express, Coca-Cola, IBM, and Wells Fargo are his "Big Four" -- to use excess cash to make share repurchases "at appropriate prices," or to otherwise pay him dividends. He says: "We applaud their actions and hope they continue on their present paths."

Buffett no doubt feels the same about his big U.K. investment in Tesco, whose shares -- at 380p -- are currently trading on an historically low earnings multiple, and offer investors a healthy 4% dividend yield.

Berkshire's 415,510,889 shareholding in Tesco (5.2% of the company) should net Buffett a dividend payout of something over £60m this year alone.

http://www.fool.com/investing/international/2013/03/07/words-of-wisdom-from-big-tesco-backer-warren-buffe.aspx