From Dividend Growth Stocks:
When investing in dividend-growth stocks, the goal is to find and buy stocks that will continue to raise their dividends. To do so, the business must generate cash in excess of its operating needs. But too many times this is simply not enough. Many companies generate significant free cash flow, but often, that cash is already spoken for in the form of debt obligations.
Prior to the most recent downturn, many companies took on enormous levels of debt, usually for one of these two reasons:
I. Fund An Acquisition
Debt has been relatively cheap for some time and easy to access. When sellers thought the buyers' stock was overpriced, they would demand significant levels of cash to close the deal. Debt was often used to raise the cash.
Analysts that follow companies have a target debt to total capital they are looking for. If they consider it is too low, management is encouraged to issue debt and use the proceeds to purchase their stock. (As an aside, before the 2008/2009 downturn some issued debt and purchased their stock close to its high. Then when the economy turned down they had to raise operating cash by, you guessed it, issuing stock well below where they purchased it.)
Having low levels of debt provides companies with greater financial flexibility. To gauge how levered a company is, the metric I like to look at is...
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More on dividends:
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Seven small-cap dividend growers to put on your radar
Seven top dividend growers to protect your portfolio from inflation