Do Some of the Lowest Yields in the S&P 500 Have Room to Grow?

Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Dividend investing is easy. Investors just need to pick the companies with the largest payouts and the best dividend histories. However, picking stocks that have the potential for future dividend growth is much harder.

The purpose of this piece is to study the cash flows of three companies in the S&P 500 that offer some of the lowest yields in the index to try and establish if investors could see an increase in their dividend income in the near future.

Precision Castparts (NYSE: PCP)

Metric

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Net Operating Cash Flow

$380

$400

$178

$392

Net Investing Cash Flow

-$83

-$920

-$608

-$3,200

Cash Available for Financing Activities

$297

-$520

-$430

-$2,808

Dividends Paid

$4.4

$4.4

$4.4

$4.4

Change in Capital Stock

$0

$0

$0

$0

Issuance/Reduction of Debt

$0

$0

$416

$3,010

Free Cash Flow

$288

$336

$0

$290

Dividend Cover from Cash Available for Financing Activities 

67.5x

0x

0x

0x

Figures in $US Millions. Financing activities include dividend payouts, changes in capital stock, and the movement of debt.

First up is Precision Castparts, which offers investors a dividend of $0.03 per share, quarterly, translating into an annualized yield of 0.06%.

Precision Castparts had plenty of room to improve its payout in the first quarter of 2012 but since then, the company's cash flow has been constricted as CAPEX spending consumes most of the company's income.

In addition, it would appear that this is not a regular occurrence, as 2011 was the only year since 2009 that the company had additional cash available after the deduction of CAPEX spending.

Even though Precision Castparts' payout costs the company only $4.4 million a quarter, I do not believe that there is any room for a further meaningful increase as the company's cash flows already appear tight.

Verdict: no near-term dividend growth potential

Pioneer Natural Resources (NYSE: PXD)

Metric

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Net Operating Cash Flow

$500

$432

$480

$360

Net Investing Cash Flow

-$1,140

-$694

-$740

-$707

Cash Available for Financing Activities

-$640

-$262

-$259

-$347

Dividends Paid

$5

$0

$5

$0

Change in Capital Stock

$0

$5.7

-$6.5

$1,260

Issuance/Reduction of Debt

$658

$269

$152

-$707

Free Cash Flow

-$357

-$290

-$268

$393

Dividend Cover from Cash Available for Financing Activities 

0x

0x

0x

0x

Figures in $US Millions. Financing activities include dividend payouts, changes in capital stock, and the movement of debt.

Pioneer offers investors a token payout of $0.08 a year and has done so since 2009, translating into an annualized dividend yield of 0.60%.

Being a natural resource company, Pioneer has high CAPEX costs as it powers ahead to try and improve output. The company is also at the mercy of financial markets to set the prices of the products it sells, which can result in highly volatile income and revenue.

Indeed, thanks to volatile income and high CAPEX spending, Pioneer's token dividend payment has not been covered at all by operating cash flow after the deduction of investing activities during the last four quarters. In addition, the company has been issuing large amounts of debt and equity to try and achieve a positive free cash flow.

Overall, Pioneer is currently struggling to generate cash from its operations. So, based on this, I do not believe there is any potential for the company to increase its payout.

Verdict: no near-term dividend growth potential

Citigroup (NYSE: C)

Metric

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Net Operating Cash Flow

$7,590

$2,570

$14,350

$6,030

Net Investing Cash Flow

$11,470

-$3,210

$28,990

-$9,280

Cash Available for Financing Activities

$19,060

-$640

$43,340

-$3,250

Dividends Paid

-$37

-$33

-$44

-$34

Change in Capital Stock

$0

$0

$2,250

4,575

Issuance/Reduction of Debt

-$19,220

-$30,210

-$28,940

-$4,760

Free Cash Flow

$6,630

$2,440

$12,580

$5,260

Dividend Cover from Cash Available for Financing Activities 

515x

0x

985x

0x

Figures in $US Millions. Financing activities include dividend payouts, changes in capital stock, and the movement of debt.

Citigroup offers investors a payout of $0.01 per quarter, or $0.04 per share, per year, leading to an annualized yield of 0.80%.

Citigroup's pre-financial crisis dividend history is impressive, the company paid out $11.2 per share in dividends during 2008 -- a yield of 5.60%.

Obviously, since then this payout has been cut and as a recipient of a huge taxpayer bailout, Citigroup has to get regulatory permission to raise its dividend or institute share repurchases, limiting the company's options.

However, last year, the company was granted permission to undertake a $1.2 billion share repurchase program and will get the opportunity to ask for permission to raise dividends again next year.

Anyway, it appears that the company does have plenty of room to increase its payout. Due to the movement of securities and revaluation of financial derivatives, bank cash flows can be difficult to understand. That said, as Citigroup's total dividend payout only amounting to about $40 million per quarter, the company has plenty of room available to improve its payouts to shareholders.

In addition, the company's Tier 1 capital ratio is 13.5% and solvency ratio 17%, indicating that the bank's financial position is improving and regulators should allow the bank to raise its payout.

Verdict: potential for near-term dividend growth

Conclusion

These three companies offer investors some of the lowest dividend yields in the S&P 500 and it appears that Citigroup is the only company that has room to increase its payout in the near-term. Based on that, investors who are looking for companies that have future dividend growth potential should avoid Precision Castparts and Pioneer.

If you're on the lookout for high-yielding stocks, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here.


Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Precision Castparts. The Motley Fool owns shares of Citigroup Inc . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure