Understanding the Dividend Screener

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Hello,

I am using the dividend screener to do a health check on the dividend stocks in my portfolios but there are a few columns for which the table tutorial doesn’t go far enough to clue me in. Could you please explain in broad terms how i should interpret:

  • FCF: Free Cash Flow: and FCF% Dividend as percent of FCF;
    • should I worry/take warning when it is negative? For eg. EMA, FTS
    • is a negative FCF% that is also > 100% in absolute value even worse? For eg. AQN
  • OCF: operating cash flow; and OCF% : Dividend as a percent of OCF:
    • is this more telling of the health of the dividend than FCF and FCF%?
    • or in other words, can a reasonable OCF% (say < ?40%?50%?) ‘offset’ a high or negative FCF%?
  • Can a company with high FCF but also Payout% >>100% sustain a healthy dividend? Eg. BEP-UN

The four utilities stocks (EMA, FTS, AQN, BEP-UN) I used as example are all dividend aristocrats, with decent screener grades and have done well for me. So, I’m quite prepared to overlook a few extreme values in the odd column, but I would appreciate your take on these questions in general.

Thank you

Dominique.

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Asked on January 21, 2020 4:34 pm
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Private answer

In some cases, it can be a blip on the radar or in others it can stay that way for years. As mentioned, utilities have had negative FCF for a number of years. It all depends on the health of the company. Can they service their debt? is debt inline with the industry or historical averages? Plenty of factors to consider.

Earnings can be impacted in a big way due to one-time events. Taking into account BEP and BIP, they are actively moving in and out of assets and as such, have many one-time costs associated with these transactions. At times these are non-cash expenses. THey impact earnings but have no bearing on the company's ability to pay a dividend, because dividend is a cash outflow. Apples to apples so to speak.

This is why it is important to take a holistic view, you can't rely on single metric, or a single ratio at a point in time. Context is everything.

Mat

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Posted by Mathieu Litalien
Answered on January 22, 2020 11:24 am
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Hi Dominique,

Negative free cash is a staple of the utility industry. It is actually one of the reasons often cited by analysts who are bearish on the industry. Utilities are a high-capex industry and FCF is after capex and dividends. So, it is a sign that they need to borrow to sustain both capex and the dividend. Is it a concern? Sure, it is definitely something to look at but I don't see it being an issue until interest rates rise in significant way.

Utilities have been operating at negative free cash flows for years. Since they generate reliable cash flows, they are easily able to raise funds through the issuance of debt or preferred shares. In turn, this is used to pay CAPEX and pay off existing debt. Operating Cash flow is definitely a more reliable metric for Utilities as it is more stable and strips out capital expenditure impacts.

As for what is a good OCF ratio? It varies, and there is no absolute number. One best practice is to compare it against its own historical average, and the industry average. Is it trending upwards vs own historical averages? This could be a warning sign.

The average payout ratio against OCF in the utility industry is 38.67%. I would say anything within 500 basis points would be good.

Let me know if I answered all of your questions.

Mat

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Posted by Mathieu Litalien
Answered on January 22, 2020 6:33 am
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