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Citigroup Inc (C) & More: Do Some of the Lowest Yields in the S&P 500 (INX) Have Room to Grow?

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Dividend investing is easy. Investors just need to pick the companies with the largest payouts and the best dividend histories. However, picking stocks that have the potential for future dividend growth is much harder.

Citigroup Inc (NYSE:C)

The purpose of this piece is to study the cash flows of three companies in the S&P 500 (INDEXSP:.INX) that offer some of the lowest yields in the index to try and establish if investors could see an increase in their dividend income in the near future.

Precision Castparts Corp. (NYSE:PCP)

Metric Q1 2012 Q2 2012 Q3 2012 Q4 2012
Net Operating Cash Flow $380 $400 $178 $392
Net Investing Cash Flow -$83 -$920 -$608 -$3,200
Cash Available for Financing Activities $297 -$520 -$430 -$2,808
Dividends Paid $4.4 $4.4 $4.4 $4.4
Change in Capital Stock $0 $0 $0 $0
Issuance/Reduction of Debt $0 $0 $416 $3,010
Free Cash Flow $288 $336 $0 $290
Dividend Cover from Cash Available for Financing Activities 67.5x 0x 0x 0x

Figures in $US Millions. Financing activities include dividend payouts, changes in capital stock, and the movement of debt. First up is Precision Castparts Corp. (NYSE:PCP), which offers investors a dividend of $0.03 per share, quarterly, translating into an annualized yield of 0.06%.

Precision Castparts Corp. (NYSE:PCP) had plenty of room to improve its payout in the first quarter of 2012 but since then, the company’s cash flow has been constricted as CAPEX spending consumes most of the company’s income.

In addition, it would appear that this is not a regular occurrence, as 2011 was the only year since 2009 that the company had additional cash available after the deduction of CAPEX spending.

Even though Precision Castparts’ payout costs the company only $4.4 million a quarter, I do not believe that there is any room for a further meaningful increase as the company’s cash flows already appear tight.

Verdict: no near-term dividend growth potential

Pioneer Natural Resources (NYSE:PXD)

Metric Q2 2012 Q3 2012 Q4 2012 Q1 2013
Net Operating Cash Flow $500 $432 $480 $360
Net Investing Cash Flow -$1,140 -$694 -$740 -$707
Cash Available for Financing Activities -$640 -$262 -$259 -$347
Dividends Paid $5 $0 $5 $0
Change in Capital Stock $0 $5.7 -$6.5 $1,260
Issuance/Reduction of Debt $658 $269 $152 -$707
Free Cash Flow -$357 -$290 -$268 $393
Dividend Cover from Cash Available for Financing Activities 0x 0x 0x 0x

Figures in $US Millions. Financing activities include dividend payouts, changes in capital stock, and the movement of debt. Pioneer Natural Resources (NYSE:PXD) offers investors a token payout of $0.08 a year and has done so since 2009, translating into an annualized dividend yield of 0.60%.

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