WHAT ARE WE LOOKING FOR?
Stocks and trusts with lots of free cash flow to give back to shareholders and unitholders.
MORE ABOUT TODAY'S SCREEN
We'll turn again to a stock screen report done by TD Securities Inc. last week. We've been looking at free cash flow for the stocks that TD covers. Today, we'll look at ones that have the lowest dividends or distributions to free cash flow. In other words, the ones that can most easily afford to pay dividends and distributions, and even possibly pay out more.
The free cash flow is based on TD's 2010 forecasts. The firm defines free cash flow as operating cash flow after changes in non-cash working capital minus expected sustaining capital expenditures. "Sustaining capital expenditures" are those needed to maintain operations, as opposed to expand operations.
WHAT DID WE FIND OUT?
TD warns that these free cash flow screens do have their limitations. A company might have lots of high free cash flow yield, but may also be planning to spend a lot of its excess cash on expansion. This means that looking at free cash flow alone could potentially dramatically overstate a given company's financial flexibility, TD said. Investors will need to do more research to examine each company's expansion plans.
Yields for most names are actually quite low on this list. That either means that free cash flow is volatile, such as with forestry companies, and the companies can't take the risk of paying out more. Or that companies need free cash flow for expansion. Or the company might increase payouts or buybacks or reduce debt with the extra cash in coming quarters.