Look to These 4 Cash Flow Kings for Rising Dividend Payouts

Philip Morris, Pfizer, McDonald's, and Johnson & Johnson have the best cash flows in their respective businesses, supporting ever increasing shareholder returns.

Mar 10, 2014 at 2:44PM

In business, cash is king. The companies with the best cash flows are often the ones that are able to achieve the best returns for their investors. Unsurprisingly, the list of the most cash-generative companies in the world is dominated by big tobacco and big pharma.

In particular, the list is topped by Philip Morris International (NYSE:PM), which has converted approximately 29% of net revenues to free cash flow during the past five years. It is followed closely by Pfizer (NYSE:PFE) (26%) and Johnson & Johnson (NYSE:JNJ) (20%). McDonald's (NYSE:MCD) also sits in the top 10, converting 16% of revenues to free cash flow during the past five years. As a quick comparison, according to the U.S. Commerce Department, U.S. corporations currently report an average profit margin of 9.3%. The average margin since 1952 has been 5.9  %.

Why is this important?
According to Investopedia, free cash flow (FCF) is a measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. It is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends, and reduce debt.

Revealing figures
 It's easy to see how these impressive free cash flow metrics impact shareholders. During the five-year period between 2008 and January 2014, McDonald's increased its dividend payout to investors by 116%. Meanwhile, Philip Morris increased its payout 104.3% and Johnson & Johnson increased its payout 43.5%. All of these payout increases were far above inflation, which is usually considered the benchmark for dividend growth.

Unfortunately, according to my data, Pfizer's payout dropped by 18.8% during this period. The company has ramped up share repurchases to compensate, however. Specifically, Pfizer has repurchased 19.4% of its shares outstanding since 2008. Still, this figure pales in comparison to Philip Morris, which has repurchased 26.4% of its outstanding shares during the past five years. McDonalds and Johnson & Johnson have repurchased 21.4% and 15.1% of their outstanding shares, respectively .

Of course, all these numbers, though impressive, do not reveal the true story. What investors like me and you really want to know is how much money do we get, and will it continue?

Show me the money
To find out how much cash is actually returned to investors, I'm going to crunch the numbers for the last four quarters of available data to try and figure out how much cash is being returned to investors as a percentage of the share price. Secondly, I'll look at how well these returns are covered by cash flow to establish whether or not they can continue.

Company

McDonald's

Philip Morris

Pfizer

Johnson & Johnson

Buybacks

$2

$6

$15

$1

Dividends

$3.1

$6

$7

$7

Total returned

$5

$12

$22

$8

Cash generated from operations

$7.3

$10

$20

$18

Dollar value retuned per share

$5

$7.5

$2.7

$2.8

Return based on current share price

5.3%

9.2%

8.3%

3%

Figures taken over the previous four quarters. Source: Marketwatch.com. Figures in billions except per-share amounts. Figures rounded to the nearest billion.

From the figures above, we can see that McDonald's returned a total of $5 billion to investors during the last four quarters; this was easily covered by the company's $7.3 billion in cash generated from operations. The same is true for Johnson & Johnson. However, both Pfizer and Philip Morris have returned, in aggregate, $2 billion more to investors over the last four quarters than they have generated from operations. For the most part, this additional payout has been funded with debt.

Still, Philip Morris and Pfizer both have robust balance sheets. This implies that these lofty returns will continue.

Foolish summary
Not only is cash conversion as a percentage of revenue an important metric to asses business profitability, but it is also helpful in determining how much cash investors will receive from the business.

Philip Morris, Johnson & Johnson, McDonald's, and Pfizer are all cash flow kings with some of the best cash conversion ratios in the business. Each of these four companies generates healthy free cash flow, most of which is returned to investors, and it would appear that this is set to continue.

Looking for other great income investments?
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and McDonald's. The Motley Fool owns shares of Johnson & Johnson, McDonald's, and Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers