Adjusted Free Cash Flow and the Dividend Payout of the S&P 100

Abstract

Free Cash Dividend Payout, calculated by dividing common dividends by adjusted free cash flow, provides useful insight into the relationship between cash flow and dividends and a company’s ability to pay them in the future. As the dividend payout increases consistently through time, it indicates that dividends are growing faster than adjusted free cash flow. In such instances, the dividend being paid might not be sustainable and is at risk for decline. When the dividend payout decreases, it indicates that adjusted free cash flow is growing faster than dividends. As a result, the dividend being paid is safer and is a potential candidate for increase.

This study calculates a dividend payout using adjusted free cash flow for the non-financial firms of the S&P 100 for the years 2000, 2001, and 2002. Adjusted free cash flow was calculated by subtracting capital expenditures and preferred dividends from operating cash flow adjusted for nonoperating and unsustainable items. Insights are provided into possible changes in corporate dividend policy at several firms.