Exxon Mobil Corporation (XOM), Chesapeake Energy Corporation (CHK): The Payout Ratio Doesn’t Tell the Whole Story

With a healthy total debt-to-equity ratio of 0.49 and profit margin of 19.1%, Union Pacific offers a quality dividend.

Time Warner Inc (NYSE:TWX) has seen its stock boom in the past couple years. It has been producing strong FCF per share around $7 and a falling dividend payout ratio currently around 32. The company is facing challenges in its main cable business, as its satellite competitors and the threat of 4G wireless internet loom in the distance. Even with these long term threats, the average American watches television more than 20 hours of television per week. With a yield of 2.5% and positive FCF, Time Warner Cable is another dividend stock to keep an eye on.

Exxon Mobil Corporation (NYSE:XOM) is a famous dividend stock, and with good reason. The company is involved in a number of areas of the energy business to help ensure stable earnings and dividends. Unlike Chesapeake Energy Corporation (NYSE:CHK), it did not place all of its resources on growing as fast as possible. While it continues to enjoy profits from refining cheap US oil, it is also working to replace its reserves by exploring the Gulf of Mexico and Liberia.

Its balance sheet is clean with a total debt to equity ratio of 0.08. In addition to its positive FCF, its return on investment of 27.3% and return on assets of 14.0% show that its 2.8% yield is backed by a profitable operation.

CHK Total Return Price data by YCharts

Conclusion

The payout ratio provides a simple way to evaluate a company’s dividend, but it always pays to take a deeper look. By looking at FCF you can see the quality of a company’s earnings and the sustainability of its operations. Chesapeake Energy Corporation (NYSE:CHK)’s negative FCF makes it obvious that the company is questionable. For long-term investors looking for stable firms, FCF positive companies like ExxonMobil and Union Pacific are better options. Time Warner Cable has a number of challenges ahead due to the growth of the internet and 4G wireless networks, but fundamentally it is a profitable firm with strong free cash flow.

Joshua Bondy has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy (NYSE:CHK), Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy.

The article The Payout Ratio Doesn’t Tell the Whole Story originally appeared on Fool.com.

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