These 3 Companies Raised Their Dividends. The Biggest Raise May Not Be the Safest
Three companies just raised their dividends, but the one with the biggest increase is also carrying the thinnest cash cushion. Knowing which raise is actually the safest requires looking past the headline numbers.
Three dividend raises came out within a few weeks of each other, but they aren’t equally safe. Phillips 66 (NYSE:PSX | PSX Price Prediction) posted the biggest increase, lifting its quarterly payout to $1.33 from $1.27. Penske Automotive Group (NYSE:PAG) added another step to a long run of quarterly increases. Avient (NYSE:AVNT) made its once-a-year raise. For income investors, the size of a raise matters less than whether cash flow can keep paying it, and below, the three payouts are ranked by how well free cash flow covers them, from strongest to weakest.
Avient Delivers the Best-Covered Raise in the Group
Avient raised its quarterly dividend to $0.2825 from $0.275, a 2.7% increase. The new annualized rate is $1.13. At Tuesday’s close of $40.35, that works out to a forward yield of 2.80%, the highest of the three.
Dividend safety: Avient generated $301.6 million in operating cash flow last year against $106.6 million in capital spending. That left about $195 million of free cash flow to cover $98.8 million in dividends, a free-cash-flow payout of roughly 51%. It ranks lowest in this group. Operating cash flow has also increased each year, from $201.6 million to $256.8 million. On GAAP earnings, the picture looks closer: trailing dividends of $1.095 against EPS of $1.85 is a payout of about 59%. Measured against the low end of management’s adjusted EPS guidance of $3.10 to $3.25, the new annual dividend falls to about 36%. Its balance sheet is also getting stronger. Avient held $425.6 million in cash, paid down $50 million of debt in the second quarter, and plans to repay $100 million to $150 million for the full year.
Track record: The company called this its sixteenth consecutive annual dividend increase. The payment history supports the recent part of that run, with the quarterly rate climbing each year from $0.2125 in 2021 to the new level.
Bull case: Its business is growing. Second-quarter adjusted EPS came in at $0.96, up 20% from a year earlier, and adjusted EBITDA margin hit a record 18.3%. Shares trade at about 12 times forward earnings, compared with 22 times trailing earnings, so the market is already pricing in that earnings recovery. Avient also just named Mike Frank chief executive, giving a new leader the chance to continue the deleveraging.
Risk: Operating cash flow was negative in both the first quarter (-$34.5 million) and the second quarter (-$42.5 million). Avient paid $25.2 million in dividends each quarter. Early-year cash outflows are normal for this company, but the second half has to make up the gap. Management has said visibility for that period is “less certain”.
Penske Automotive Group Pays a Well-Covered Raise With a Clock Running
Penske raised its quarterly payout to $1.46 from $1.44, a 1.4% increase. The annualized dividend is now $5.84, a forward yield of 2.75% at the latest price of $212.25.
Dividend safety: Last year Penske produced $975.1 million in operating cash flow and spent $324.6 million on capital projects. That left about $650.5 million in free cash flow against $343.8 million in dividends, for a free-cash-flow payout of about 53%. The trailing earnings payout ratio is 41%. Operating cash flow was positive in every reported quarter from the start of 2024 through the most recent quarter. Penske’s weak point is cash: it held only $69.5 million, and interest expense rose 53.2% year over year.
Track record: The previous $1.44 payment was Penske’s 23rd consecutive quarterly dividend increase. The payment history shows a higher amount in every listed quarter, from $0.43 in early 2021 to the new $1.46 rate.
Bull case: Penske makes money from several sources, which steadies the cash that funds the dividend. Second-quarter adjusted EPS of $3.62 beat the $3.39 estimate, and revenue rose 11.1% to $8.51 billion. The company’s 28.9% stake in Penske Transportation Solutions contributed $57.4 million in equity earnings, up 7%. Recent Toyota and Lexus acquisitions add roughly $2 billion in annualized revenue.
Risk: It announced the raise on the same day. Penske also announced an agreement to be taken private by Penske Corporation and Mitsui & Co. in an all-cash deal. If the deal closes, public shareholders get the buyout price and the dividend stream ends, while the raise is well covered, but income investors may only receive it for a short time.
Phillips 66 Posts the Biggest Raise With the Thinnest Cash Cushion
Phillips 66 increased its quarterly dividend to $1.33, a 4.7% raise and the largest of the three. The annualized rate of $5.32 yields 1.83% at the latest close of $291.03. The yield is low mainly because the stock has rallied: shares traded at $206.90 when the second-quarter results were filed.
Dividend safety: On earnings, the payout is easy to cover. Trailing dividends of $4.94 against EPS of $17.50 is a payout of about 28%. Cash flow is closer. Last year Phillips 66 generated $4.962 billion in operating cash flow, versus $2.233 billion in capital spending. That left about $2.729 billion in free cash flow to cover $1.922 billion in dividends, a free-cash-flow payout of roughly 70%, before $1.207 billion in buybacks. Leverage has also increased: total debt reached $27.1 billion, and debt-to-capital rose to 48% from 39% at year-end after the Lindsey Oil Refinery acquisition.
Track record: The quarterly dividend has grown from $0.20 in 2012 to the new rate. The rate held at $0.90 through 2020 and early 2021, so the long-term trend is up, but the company hasn’t raised it every year.
Bull case: When refining margins are strong, Phillips 66 brings in a lot of cash. Second-quarter adjusted EPS of $9.41 beat the $8.09 estimate, and operating cash flow reached $7.259 billion against just $508 million in dividends. Shares trade at about 10 times forward earnings, compared with 17 times trailing. Analysts’ average price target of $283.05 is already below the current price, however, so much of that good news looks priced in.
Risk: Refining margins can move quickly. They were $10.11 per barrel in the first quarter, up to $24.08 in the second. During that weak first quarter, operating cash flow was -$2.264 billion while the company still paid $509 million in dividends.
Avient Takes the Safest-Raise Crown
Ranked by free-cash-flow coverage, Avient comes first at about 51%, Penske second at 53%, and Phillips 66 last at 70%. With the best coverage, the highest forward yield, and falling debt, Avient’s raise is the safest of the three. Penske’s increase is nearly as well funded, but the take-private deal limits how long public holders will receive it. Phillips 66 offers the biggest raise, but income investors who own it are relying on refining margins staying strong. Coverage ratios like these are also the first place to look for the warning signs that a payout is heading the other way (we listed all seven of them in a free dividend trap guide).
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Chris Lange is a financial and geopolitical writer with more than a decade of experience covering a myriad of topics. He has published thousands of articles for 24/7 Wall St., with past coverage focused heavily on stocks, IPOs, healthcare, defense, global affairs, and technology.
His work has been quoted, or referenced by a number of outlets including Business Insider, USA Today, Yahoo Finance, MSN, The Motley Fool, and many other publications. A graduate of Southwestern University, he studied business with a focus on investments and has previous experience in banking and startups.
When not reading or writing the news, he is following his passion for Lacrosse, playing chess, or building solar projects with his dad.
