Are your investments in the dividend dangerzone?

[Itsallaguess]

Interesting article in the Telegraph today, regarding dividend danger-zones....

When they choose dividend-paying stocks, investors may be drawn to the highest paying companies. But it’s not a good strategy, Mr White warned.

“If you just select stocks based on dividend yield you will have a disastrous portfolio,” he said.

“You have got to select stocks on their ability to generate cash and grow that cashflow over the next few years – that way they are more likely to have the ability to pay dividends and grow that dividend. The dividend has to be viewed as the icing on the cake rather than the cake itself.”

How can you tell if a dividend is sustainable or likely to grow? We’ve brought together four calculations often used by the professionals. Arm yourself with a copy of the most recent company accounts and get out your calculator…

http://www.telegraph.co.uk/investing/sh ... angerzone/

Great to see a mainstream on-line newspaper discussing things like [i]Operating free cashflow cover[/i..

Cheers,

Itsallaguess

[UncleEbenezer]

Has Luni popped up in a new place, or is someone channelling him?

[Dod1010]

Interesting item Itsallaguess and of course absolutely true.

In fact following an article in the Sunday Times today and a slight feeling of unease, I am thinking of cutting my holding in Legal & General by one third on just these grounds. That is unlike me because I have held (and will continue to hold) L & G for upwards of 20 years but I am a little uneasy about their new idea of investing in infrastructure projects. That and the style of the CEO does not fill me full of joy.

I can do that without any problems because it is one of my bigger holdings at getting on for twice my average size holding (about the same as median for those interested) I might well buy Standard Life notwithstanding its tangle with Aberdeen. The same paper comments that the new Standard Life/Aberdeen merger might well take on the remaining bit of Scottish Widows from Lloyds in due course. That could be interesting.

Dod

[Gengulphus]

Interesting article in the Telegraph today, regarding dividend danger-zones....
...
http://www.telegraph.co.uk/investing/sh ... angerzone/

Great to see a mainstream on-line newspaper discussing things like Operating free cashflow cover..

It would be rather more interesting if it didn't contain howlers such as:

* RDSB being quoted as having a yield of 68.2%. It's an obvious typo, probably for 6.2% or 6.8%, and isn't a serious problem in itself. But if a number that obviously wrong has slipped through into the published article, quite clearly no-one has put even a small amount of effort into checking that the numbers in the article are correct - so how many other, less obvious errors are there lurking there?

* Saying "Ten FTSE 100 stocks have earnings cover of less than 1.2 times. Admittedly, some are real estate investment trusts, which have to pay out 90pc of their earnings, so their earnings cover will never be more than 1.1 times." below a table showing the ten shares - with British Land's forecast dividend cover being shown as 1.18 in that table! Clear evidence IMHO that the reporter was just throwing various quotes and numbers together without any real thought about whether what she was saying was making sense...

As for the idea expressed in the thread that this is some sort of resurrection of Luni's theories, that's nonsense. The four checks suggested in the article are on dividend cover by earnings, dividend cover by free cash flow, one particular form of gearing, and interest cover, and there is of course an implicit check on market cap in it only looking at FTSE 100 shares - all fairly standard dividend safety checks. No mention of Luni's beloved "yield multiple" - and I don't remember him ever running "Danger zone" together into the single all-lower-case word "dangerzone"...

Gengulphus

[Dod1010]

With the stockmarket at the height it is and considering the considerable political risks around at the moment, Brexit, Mrs may's inability to 'get a grip' and the possibility if not more of Comrade Corbyn in Downing Street, I think it is a timely enough message despite the errors quoted by Gengulphus.

It is actually more than usually difficult to see what is happening and I am sure caution is the watch word.

Dod

[OLTB]

As for the idea expressed in the thread that this is some sort of resurrection of Luni's theories, that's nonsense. The four checks suggested in the article are on dividend cover by earnings, dividend cover by free cash flow, one particular form of gearing, and interest cover, and there is of course an implicit check on market cap in it only looking at FTSE 100 shares - all fairly standard dividend safety checks. No mention of Luni's beloved "yield multiple" - and I don't remember him ever running "Danger zone" together into the single all-lower-case word "dangerzone"...

I was a bit late to the party in terms of HYP investing and TMF - Luinversal seems to have been a great source of information and debate as well as knowledgeable, enthusiastic and well respected from many contributors here.

Cheers, OLTB.

[tjh290633]

I was a bit late to the party in terms of HYP investing and TMF - Luinversal seems to have been a great source of information and debate as well as knowledgeable, enthusiastic and well respected from many contributors here.

Cheers, OLTB.

He certainly produced a great volume of posts, although opinions varied about his ranking ideas.

If you ignored those, there was a lot of information for those new to the field.

TJH

[Gengulphus]

I was a bit late to the party in terms of HYP investing and TMF - Luinversal seems to have been a great source of information and debate as well as knowledgeable, enthusiastic and well respected from many contributors here.

Just to be clear, in that part of my post I was only saying that the article quite simply doesn't say anything at all about Luniversal's theories. The only resemblance is that the article talks about a "dangerzone" and Luniversal talked about a "Danger Zone" - but they don't mean the same thing by those phrases, no matter how similar they may be. In particular, the article bases its "dangerzone" around dividend cover (by earnings and by free cash flow), gearing and interest cover, while Luniversal based his "Danger Zone" purely on yield - IIRC, originally a yield greater than 1.5 times the FTSE AllShare yield put a share in his "Danger Zone", and he later revised that to 1.6 times the FTSE AllShare yield, with 1.5-1.6 times it being in his "Warning Zone".

Gengulphus

[OLTB]

I understand Gengulphus, and simply highlighted your comment as a reference to Luniversal rather than any comment on his theories and your opinions on them.

Anyway, let's see if there are any further opinions re the OP and dividend Danger zone (or dangerzone!). Petrofac anyone?

Cheers, OLTB.

[moorfield]

Great to see a mainstream on-line newspaper discussing things like Operating free cashflow cover

“Operating free cashflow cover” is one of my preferred measures also, and not too difficult to divine from a company’s cashflow statement. I have an old Moneyweek article written by Phil Oakley which handles one calculation succinctly with examples (opinions may vary on how one deals with capital maintenance/expenditure). For anyone interested I’ve found the URL here.

http://moneyweek.com/four-ways-to-test-cash-flow-55012/

It’s important too to look at the trend of any such ratio over several accounting periods.

M

[Itsallaguess]

Great to see a mainstream on-line newspaper discussing things like Operating free cashflow cover

“Operating free cashflow cover” is one of my preferred measures also, and not too difficult to divine from a company’s cashflow statement.

I have an old Moneyweek article written by Phil Oakley which handles one calculation succinctly with examples (opinions may vary on how one deals with capital maintenance/expenditure). For anyone interested I’ve found the URL here.

http://moneyweek.com/four-ways-to-test-cash-flow-55012/

It’s important too to look at the trend of any such ratio over several accounting periods.

M

That's brilliant moorfield, thanks for that.

For interest, and hopefully also for completeness, here's a link to the 2010 results for Reckitt Benckiser, which the above MoneyWeek article covers for their worked-example of Free Cash Flow -

http://www.investegate.co.uk/reckitt-be ... 0000PBF22/

I think it's really useful to have as many worked-examples of this type of metric as we can, as it helps to show that it's not as difficult to look at as we tend to think when first exposed to it.

A few of us did something similar for a few companies on TMF back in 2011 (wow, was it really that long ago!), and a fantastic TMF poster called jackofbasel became a bit of a cult hero at the time as he had a lot more experience than the rest of us, and we learnt a great deal from him in a short space of time.

The original 2011 TMF thread is here for anyone interested -

https://web.archive.org/web/20170619145 ... sort=whole

Within that thread I developed a basic Excel spreadsheet that people could use to help generate the FCF metrics, and I've uploaded a copy here showing the Northern Rock 2010 results -

https://ufile.io/6y4cn

Another TMF poster at the time, longtermbuynhold, then turned it into an on-line GoogleDoc spreadsheet, which is linked below if it's still operational -

https://docs.google.com/spreadsheets/d/ ... iqAF#gid=0

I don't think we do enough of this type of stuff myself, and given that it's not all that difficult once a few worked examples are walked through I think that's a real shame. I think anyone looking for companies paying relatively large parts of their earnings out as dividends, to enable the holders to use the income from them, would do well to better understand if these companies actually have the free-cash-flow to enable them to do that, and where they haven't, come to a better understanding as to why that might be, and how long-term a problem they might have to deal with...

Thanks for giving me the opportunity to discuss this, and provide the above links. I hope they're of use to someone.

Cheers,

Itsallaguess

[monabri]

From the RB calculations:-

FCF per share/share price can be used as a valuation measure to compare shares with other investments. RB’s current yield of 5.3% (168.3/3195p) is not particularly high, suggesting the shares are not an obvious bargain. Value investors often buy shares with FCF yields of 10% or more.

RB's share price at close was £79.82.

So, over approx 7 years an average sp increase of just under £7 per year ...and then there are the divis on top!

mmm...

[csearle]

In particular, the article bases its "dangerzone" around dividend cover (by earnings and by free cash flow), gearing and interest cover, while Luniversal based his "Danger Zone" purely on yield - IIRC, originally a yield greater than 1.5 times the FTSE AllShare yield put a share in his "Danger Zone", and he later revised that to 1.6 times the FTSE AllShare yield, with 1.5-1.6 times it being in his "Warning Zone".

It was those arbitrary zonal boundaries that put me off completely. A share could be in one zone or another on the basis of a whim of the Zonemeister*.

I prefer to have a ranked watchlist with no artificial boundaries.

Regards,
Chris
*Remember: you heard it here first.