Free cash flow -- calculated as operating cash flow minus capital expenditures -- is an important metric for dividend investors, as it represents the cash remaining after the company spends the capital necessary to maintain its business and invest in future growth. It's from free cash flow that a company can reward its shareholders with dividends and share buybacks, and Apple (AAPL +2.08%), Disney (DIS 0.68%), and Starbucks (SBUX +0.63%) have done just that in recent years.
Even better, with their cash flows set to rise even further in the years ahead, these outstanding businesses are poised to deliver steadily growing streams of dividend income to their investors.
Apple
Apple has the most impressive cash-flow generation of any company I've ever studied. In fact, during the last 12 months, Apple's free cash flow was just below $70 billion.
That's allowed the tech titan to implement the largest capital return program in history. Apple recently expanded this program, which first began in August 2012, to a cumulative total of $200 billion that the company intends to pass on to shareholders by the end of March 2017. Of that amount, Apple will pay $60 billion in dividends, and use an incredible $140 billion on share repurchases.
While those numbers are staggering, Apple should have little trouble raising its dividend even further in the years ahead. Analysts expect Apple to deliver earnings growth of nearly 14% annually during the next five years. With the company currently paying out less than 20% of its trailing 12-month free cash flow in dividends, Apple could comfortably increase its dividend at a rate that matches, and even exceeds, its earnings growth during the next half-decade, particularly if it decides to tilt its future capital return programs toward a more even split between share repurchases and dividends.
Magic Kingdom Park at The Walt Disney World Resort. Source: Disney.
Disney
Disney is another cash-flow-generating machine. The company's parks and resorts possess tremendous operating leverage, and with attendance near all all-time highs, these assets are helping to produce a lot of cash, with operating income increasing 9%, to $922 million, in the most recent quarter.
And although Disney's media networks are beginning to be affected by the cord-cutting trend, they remain highly profitable, delivering $2.4 billion in operating income during that same period. Disney's studio entertainment and consumer products divisions also continue to throw off cash, with these segments delivering year-over-year operating income growth of 15% and 27%, respectively.
But even more exciting is what lies ahead for Disney. The entertainment giant has a multi-year pipeline of what are likely to-be blockbuster movies, highlighted by a new Star Wars film that some analysts believe could be the most profitable movie of all time. And let's not forget Disney Shanghai, the massive theme park that's expected to open in China early in 2016, and quickly become the most-trafficked resort in the world. The excitement surrounding this new megaattraction and these highly anticipated movies should help to boost results across all of Disney's operating segments.
Combined, analysts expect these catalysts to drive 14% annualized earnings growth for Disney during the next five years. That should allow the company to continue to raise its dividend by double-digit percentages during that time.
Also of note is that Disney is currently using more of its cash flow to buy back stock than it does to pay dividends. Should it decide to devote a larger percentage of its free cash flow toward dividends, its annual payout increases could exceed 15% in the next several years.
Starbucks
Starbucks is a compounding machine; the company's highly profitable cafes produce steadily growing streams of cash flow that Starbucks can reinvest into building new cafes, which produce even more cash, and so forth. It's a virtuous cycle that has compounded the wealth of Starbucks' investors for decades, and will likely continue to do so for many years to come.
In recent years, management has been passing on more of that cash to shareholders in the form of a quickly growing dividend. I expect that trend to continue, with Starbucks' international expansion and booming consumer packaged-goods business set to boost revenue and profits in the years ahead.
In addition, like Apple and Disney, Starbucks can afford to devote a greater percentage of its cash flow toward dividends, as the coffee titan paid out only about 40% of its free cash flow in the last four quarters. Regardless, with an expected earnings growth rate of 18% per year during the next five years, Starbucks shareholders can expect a stream of near 20% annualized increases in their dividend payments in the years ahead.
