High Free Cash Flow, low Debt, excellent Top Executives and an expected price decline are key for success. They are my FAB 4.
The Beattles will be forever The FAB 4, however I took the liberty of using this term for my 4 simple rules that usually work well for founding a sound growing dividend.
Many others have different rules that work even better, but I stick to my rules and I will try to learn from it
1)Free Cash Flow Yield higher than 10% and consistent
This is actually a very strict rule that happen very rarely with good companies and even more now.
When a company has been consistently positive in generating cash flow and always above its dividend, this gives me the confidence on the management discipline and prudence.
Once we have this condition and, on top, we have (due to different reasons) very high Free Cash Flow yield than I have my first condition flashing Opportunity!!!
2) Low Debt level
Low level of Debt gives to the shareholder more power on the Free Cash Flow generated, so allows me to have a bigger piece of the distribution.
What is low Debt Level for me? it depends. Especially on the interest cost and the ability to estinguish it with its normal operations.
So usually it should not be higher than twice the Free Cash Flow.
This is also gives the company high flexibility during recession to keep paying the dividend until the Profit will come back to normal levels.
3)Trustful and respected Management
Business is people and good people make good business. Excellent management makes superb business.
It should be well respected and experienced and prudent in its plan and objective.
During earnings presentation you can understand from analysts questions and approach if the management is respected.
Also clean financial numbers and a long dividend history do not lie (90%)!
4)Margin on safety
Price is also important, And I prefer a company when its price is way below analysts’ target price. this gives me a higher margin of safety.
Of course, the entry price should be in line with the FCF condition and this usually ensures me that the price is already low enough.
I will review these rules in my company evaluations and I hope you could come back with additional ideas and theory.
I am sure we could find nice companies that can be your next Dividend 4 You,