so was looking at large cap dividend payers and wanted to see the sustainability of their dividend payments…decided to take a look at a few and was really surprised at the high dividend payout ratios…i just want to confirm that im understanding this correctly…so for example… T…using yahoo finance says the payout ratio TTM is 235%
since its over 100% doesnt that mean they are pulling from retained earnings to support the attractive yield? isnt that unsustainable?
so then i looked at NLY since its so well known for its dividends in this environment…423%…really??
am i missing something here? can someone much smarter than me school me on this?
you can have a high payout ratio if there is a high level of depreciation or non cash charges…yes its suspect but for the telecom industry where capex (dep) is heavy, it doesn’t necessarily mean they’re overreaching…you want to see how they’re funding their divs above earnings (working capital, issuance of debt etc)…
if you want to take a look at how dividends are unsustainable and funded with debt, check out the Canadian REITS…from my survey, a lot of them basically can’t cover and must issue debt or capital to fund their high payouts…if capital markets here collapse, watch for them to tank…
AT&T (T), for example, had 2011 net earnings of $0.66 per share. It paid out a dividend of $1.76, for a nominal payout ratio of 267%. Normally such a high payout ratio is viewed as an extreme sign of danger. In this case, however, the dividend is completely supported. Free cash flow is a measure of a company’s profitability that adds back into earnings such non-cash expenses as depreciation and amortization. Free cash flow also generally adds back in interest expenses and capital expenditures, but since these are necessary expenses from a stockholder’s point of view, I prefer to use Warren Buffett’s concept of owner earnings.
Owner earnings can be thought of as the cash generated by a company that is available for distribution to the company’s owners. Owner earnings can be calculated as net income plus non cash charges such as depreciation and amortization, less the capital expenditures necessary to maintain the business. AT&T had depletion, depreciation, and amortization costs of $18.4 billion in 2011, and so AT&T owner earnings in 2011 is about $22.3 billion, or $3.75 per share. So AT&T pays a dividend equal to 47% of its owner earnings, or a much more sustainable rate.
Frank can you help me wrap my head around this idea? I mean I get it, just add back depreciation, therefore, any company with huge capex and thus substantial depreciation can do this…but why? If each period the assets are losing value, how can you just decide to not account for it by adding it back? How can u just say oh well just dont count that?
you’re absolutely right you should count depreciation…however, capex goes in cycles and often times depreciation rates run higher than their replacement values…but, a company cannot sustain a above payout ratio of 100% indefinitely…so to answer your question, you should be weary of companies with high payouts but you must understand that certain times through the cycle this will happen…the safety in your dividend is dependent on how likely it is that the company will have to spend more than depreciation going forward to maintain their earnings…
buffet hated telecoms cause he knew you had little owner earnings…capex always grew and grew…