Tuesday, 25 July 2017
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 per share / dividend per share
If free cash flow is sufficient to pay dividends then the ratio will be more than 1.
It is a goo idea to compare free cash flow per share with dividends per share over a period of 10 years.
Interpreting free cash flow dividend cover
1. A great business generates consistent and growing free cash flows.
2. During a company's period of heavy investment, the free cash flow may not cover its dividend.
3. Usually, this maybe for that period and its free cash flow will soon be more than sufficient to cover dividends.
4. When free cash flow per share exceeds the dividend per share by a big margin, it can be a sign that the company may be capable of paying a much bigger dividend in the future.
Posted by investbullbear at 22:42