Then it depends on how well the equipment is maintained. In reality, this can make a huge difference.

For simple illustration.
A car depreciation of 5 years, in accounting sense, 5 years obsolete, need to buy a new car to replace, but if the car is maintained well and still running well after 6,7 or 9 years, then on those year company is running without need a capex, without depreciation charge that reduce the profit figure.

Imagine this apply on multi-millions machinery and equipment.

This can be the huge difference of a well managed company vs a poor managed company.

In this case, it would be just a matter of time before their auditors spot this and ask them to revise their accounting estimates ("change your depreciation policy!!!" )

In your example, assuming there are no other major activities, from year 6 onwards there is no huge difference between earning and free cash flow. Which is what Pink Spider said, "... cash flow and accounting earning even out over time."

Dividend payout can be over 100% between year 2 and year 5, but it can't be forever...

= = =

Let's describe this in a simple, perfect example:

- A company's EBITDA is 500k year after year
- in year 1, it has a capex of 500k, depreciated over 5 years
- no tax, interests etc
- no other major investing and financing activities

Y1 - earning 400k, cash flow 0
Y2 - earning 400k, cash flow 500k
Y3 - earning 400k, cash flow 500k
Y4 - earning 400k, cash flow 500k
Y5 - earning 400k, cash flow 500k
Y6 - earning 500k, cash flow 500k

From Y2 to Y5, cash flow is more than earning, so payout ratio of over 100% is possible. Still, if it is 174%, I will be skeptical.
Y6 onward, payout ratio cannot be over 100%.

This post has been edited by river.sand: Mar 1 2013, 08:35 AM

There are some companies paying dividend higher than cashflow. This are mostly from cash in hand (Amway, Tasek to name a few...) and the worst bunch are those taking loans to pay dividends... ( ).

, some who don't check their financial report carefully might think they found dividend treasure

Depreciation rate have to be consistent, if not accounting fraud easily occurs.

Personally, for this reason alone, I don't really like really High Capex company, because it just a matter of time they need to replace their asset in order to generate more operating profit.

Are you familiar with a company called Lindt.. the chocolate maker, traded in the swiss exchange, they depreciated machines and buildings in matter of months... Those that caught on this early were richly rewarded... as it was selling wayyyy below value. Super conservative company...actually hiding earnings.

This post has been edited by gark: Feb 28 2013, 07:46 PM

sorry got a question, say if one has 100k now...if there is a stock that gives consistent dividends about 4% pa for the past 10yrs..is this worthwhile? Or we should split into 3-4stocks, averaging 4-5% dividends? Plz advice..thanks. Btw, am I expecting too little or too much, on 5% dividend per year every year for stocks investments?

Why EPS is not the right indicator that related to DPS ? Isn't cash flow generated each year will be used to calculate the net profit and net profit divided by total shares = EPS......

If a company able to generate 20 cents each year, and payout ratio 100% ,then it would be 20 cents Dividend every year.

JTI payout ratio for usual dividend always less than the EPS, and once in few years only payout as special dividend.

i check on maxis, 40 cents DPS every year, but their EPS < 40 cents per years, so where the cash coming from, increasing gearing......
why?

Depreciation of assets decreases EPS but maxis actually still have the cash from revenue. However, i have seen few analyst report which seen to be unreasonable. How can they keep on assuming maxis continue DPS greater than EPS? If maxis need $ for CAPEX, then may lower DPS.

Speaking of NCB which we're talking about earlier:

NCB HOLDINGS BHD [] reported a 47% drop in net profit to RM23.48 million in the fourth quarter ended December 31, 2012 (4QFY12 ), from RM44.6 million a year earlier as the port operator handled less cargo during the period.

NCB said "lower container throughput handled by Northport for the quarter" had led to a slight decline in NCB's revenue to RM236.22 million.

NCB is paying a final dividend of 2.5 sen a share.

It said its port operations are expected to encounter challenges amid a competitive environment and uncertainties in global container trade.

http://www.theedgemalaysia.com/business-ne...aritim-ncb.html

Wow.. dividend investors must be disappointing with the smaller dividend after gorging on the high dividend in 2010/2011.. today the share lost 23 cents/share...

CCMDBIO and OPENSYS giving me 7-9% dividend for consecutive 2 years. :-)

Your assumption that cash flow generated is used to calculate the net profit is wrong. Net profit and EPS is calculated without taking cash flow into account.

Which is why EPS should not be used as a main indicator of dividends because it does not reflect the ability of the company to pay CASH.

Depends on your investing style, of which there's many, and even for dividend income, it's a relative challenge to balance out the style of various dividend paying companies.

The key thing is to try to look further into the future, based on the current company fundamentals, and their potential on:

Sustainability vs Growth- Cashflow & Profits (Are they paying more dividends out compared to the amount of cash/profits coming in?) against the amount of retained profit of which they can use to grow the company (to ideally grow the profit, and hence grow the dividend amount as well).

One of Warren Buffett's favourite quote by Wayne Gretzky
“I skate to where the puck is going, not where it has been”

Well written! After all, for some businesses, earnings can be booked as receivables AKA people owing you money for what you sold them, and until you actually get them in cash, will that mean that you've sort of crystalized your earnings.

Any similar website for KLCI?

thank u..so meaning i don only look for consistency in paying out, but also paying more and more years after years? Hmm not easy to find 1 in Bursa i think...

There are quite a few of them... with increasing dividend payout over the years, but they don't come cheap.

Look harder...

This post has been edited by gark: Mar 2 2013, 12:02 PM