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Subject:  Re: iPIG Portfolio FAQ v. 1.0.1 Date:  5/18/2013  12:53 AM
Author:  kelbon Number:  126 of 882

APD's dividends are covered by operating cash flow, just not free cash flow.

Exactly the same argument could have been made about Avon. Avon's operating cash flow was about twice their dividends. And, as is the case with Air Products & Chemicals, Avon's dividends exceeded their free cash flow. The rest is history; especially for "dividend growth investors."

If this is the benchmark ("dividends are covered by operating cash flow"), what's the point of being conservative about the payout ratio as it pertains to earnings? Operating earnings are always greater than net earnings.

There are some companies, in some industries, that habitually rely on debt because of their business model (high capital expenditures) and they are able to do so because of their very reliable and predictable income streams. However, red flags are raised when a company, that, up until four years ago, was able—and comfortably so—to cover their dividend payments with free cash-flow morphs into a company that is now unable to; just like Avon.

Mental gymnastic around whether dividends are being paid from free cash-flow and capex is being funded from debt, or visa versa, are redundant. At the end of the day, if a company can't meet their expenses in total the first thing to go (or be cut) is the dividend.

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