Pfizer, Cisco, and 5 Other Cash Flow Stocks to Increase Their Dividends

A company’s free cash is a lifeline for dividends, buybacks and other uses of capital. If that well dries up or even slows down, a company may be forced to cut back on spending.

For this screen, Barron’s looked for S&P 500 companies whose cash flow yields exceed their dividend yields. When these two metrics line up like this, it indicates that a company has plenty of cash flow to cover its dividend and grow it.

“This is a sign that they have a lot of firepower,” says Julian McManus, co-director at


Janus Henderson Global Select Fund

(point: JORAX) “If they want to raise their dividend, they certainly can.”

He adds that it’s a question of how adept management teams are at determining the best ways to use that cash “to create the greatest shareholder value.”

However, using cash flow performance for stock selection should be integrated with deeper research about a company, including the health of its balance sheet, growth prospects, free cash flow prospects, and competitive landscape.

However, “a free cash flow yield is a strong first cut for finding those companies that are cheaply valued and have an opportunity to generate dividends,” says McManus.

In this display, which used data from Bloomberg, Barron’s looked for S&P 500 companies with a dividend yield of at least 3%, nearly double the index’s average of around 1.6%, but no more than 4%. The higher the yield, the more likely a stock is a value trap.

Company / Ticker Dividend yield Free cash flow yield Market value (billion) YTD Return
Main Financial Group / PFG 3.8% 16.6% $16.9 -5.7%
Economic Regions / RF 3.8 13.9 19.8 -1.3
Exxon Mobil / XOM 3.6 11.9 408.3 61.8
Chevron / CVX 3.5 9.6 321.8 42.2
Cisco Systems / CSCO 3.4 7.1 187.9 -26.8
Pfizer / PFE 3.2 11.2 283.4 -12.5
Northern Trust / NTRS 3.0 5.0 20.8 -15.5

Data up to July 29.

Sources: Bloomberg and FactSet

To qualify for the screen, a company had to have a cash flow yield greater than its dividend yield to begin with. Cash flow returns were calculated on a per share basis.

Another criterion for the screen was a total debt-to-equity ratio of no more than 50%. The rationale was that companies with debt could struggle to maintain, much less increase, their dividends as interest rates rise.

The screen also took into account dividend payout ratios, or the percentage of earnings that are paid out in dividends. Barron’s looked for companies with a ratio below 55%, a fairly conservative number that provides enough flexibility to increase dividends.

The accompanying table shows the seven companies that made the cut for this display.

Main Financial Group

(

PFG

), which helps clients invest for retirement, including asset management, has one of the widest spreads between cash flow yield and dividend yield, 16.6% to 3.8%. The stock has returned minus 6% this year through the close on July 29, including dividends.

That compares with minus 13% for the S&P 500.

Economic Regions

(RF), a regional bank based in Birmingham, Ala., has a free cash flow yield of nearly 14%, well above its recent dividend yield of 3.8%.

Last month the company said it planned to raise its quarterly dividend to 20 cents a share, up 3 cents, or nearly 18%, from 17 cents.

Two major global energy companies—

ExxonMobil

(XOM) and

Chevron

(CVX)—both made the screen cut. Both companies benefited from rising oil and gas prices.

Although earlier in the pandemic there were questions about whether

ExxonMobil

could maintain its dividend, eventually raising it last fall by a penny to 88 cents a share on a quarterly basis. This move allowed it to remain a member of the S&P 500 Dividend Aristocrats Index. All of these companies have paid a higher dividend for at least 25 consecutive years. The company reported on July 29 that its free cash flow for the second quarter came in at $16.9 billion, up from about $7 billion in the year-ago period. It paid out $3.7 billion in dividends in the most recent quarter.

Chevron
‘small

Free cash flow for the second quarter was $10.6 billion, compared with $5.2 billion last year. Its quarterly dividend is $1.42 per share.

Pharmaceutical giant

Pfizer

(PFE) also made the list. In the first half of this year, the company paid out $4.5 billion in dividends. Its quarterly dividend is 40 cents per share.

The company’s free cash flow was $29.9 billion in 2021, up from $10.5 billion in 2019. It totaled about $6 billion in the first quarter of this year.

Pfizer

defines free cash as US generally accepted accounting principles, or GAAP, net operating cash flow less purchases of property and plant equipment.

Cisco Systems

(CSCO) is the only technology company on the list. Its free cash flow yield of 7.1% was more than double its dividend yield of 3.4%. The company has said it plans to return at least 50% of its free cash annually through dividends and share buybacks.

During the first three quarters of the company’s most current fiscal year, which ended in July, the company’s free cash flow was $9.2 billion—down from $10.4 billion last year, but still enough to cover and the dividend increase. The company raised its quarterly dividend to 38 cents per share, an increase of a penny or nearly 3%.

It completes the list of seven companies

Northern Trust

(NTRS), a major bank based in Chicago. In mid-July, the company announced a quarterly dividend of 75 cents per share, up 5 cents, for a 7% increase.

Write to Lawrence C. Strauss at lawrence.strauss@barrons.com

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