Many investors seek firms that are good dividend-payers. But what makes a firm a reliable bet? One of the keys to assessing dividend strength is cash flow.
Free cash flow per share takes the annual cash flow available to pay dividends and divides by the number of ordinary shares in issue. Free cash flow is operating cash flow after non-discretionary items, such as bank interest and tax have been deducted (a deduction for essential capital expenditure may also be made).
In theory, that leaves the cash available to pay dividends – the higher the better. In practice, the directors will have a dividend policy, but the higher a firm’s free cash flow, the more likely it is the directors will hit dividend targets.
• See Tim Bennett’s video tutorial: Five ways companies can cook cash flow.