An article just posted by Dividends Value offers an instructive look at how to evaluate companies to see if they’re likely to sustain and grow their dividends (see “In Dividend Investing, Cash Is King“).
Two companies – Genuine Parts [[GPC]] and General Electric [[GE]] – are compared with respect to free cash flow, cash flow per diluted share, cash payout ratio, debt to total capital, and cash return on capital employed.
In the example, it’s shown that GPC is “doing a much better job than GE in earning a return on its invested capital” and thus might be seen as having a greater likelihood of growing its dividend.
One point to note, however, is that this example uses data from last year and doesn’t reflect GE’s recent 70% dividend cut or its moves to reduce the size of GE Capital, both of which could certainly put things in a different light going forward. (Note: I’m currently short puts on both GE and GPC.)