Course 407: High-Yield Stocks
Are the Company's Sales and Earnings in Line and Stable?
In this course
1 Introduction
2 What Is the Company's Dividend Track Record?
3 Is the Payout Ratio Rising?
4 Are the Company's Sales and Earnings in Line and Stable?
5 Does the Company Generate Consistent Free Cash Flow?
6 Is the Balance Sheet Healthy?
7 How Has the Stock Performed?
8 Is This Stock Expensive Relative to Others in Its Industry?
9 Conclusion: Looking Both Ways

Consistent earnings power is the key to maintaining a dividend. In order to pay a plump dividend year after year, a firm needs a business that generates a reliable stream of cash. Earnings alone might not show the whole picture, though. It is possible to keep earnings steady despite weakening revenues, just by cutting costs. But eventually, such a company in a declining market will exhaust the possibilities for cost-cutting, and earnings will fall. Philip Morris has been a slow but consistent grower in recent years, with revenue inching up 3% per year. Earnings, for the most part, have been consistent, as well. The only recent exception has been in 1998, when earnings dipped 15% year-on-year, which explains the spike in the payout ratio: Philip Morris maintained its dividend even though earnings softened. One major potential threat to the company's earnings, though, is tobacco lawsuits. That's why it's important to consider Philip Morris' cash flow.

Next: Does the Company Generate Consistent Free Cash Flow? >>


Search
Print Lesson |Feedback
Del.icio.us Del.icio.us | Digg! digg it
Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.
Copyright 2015 Morningstar, Inc. All rights reserved. Please read our Privacy Policy.
If you have questions or comments please contact Morningstar.