How To Think About Debt, Leverage, And Dividend Coverage

Seeking AlphaPortfolio StrategyHow To Think About Debt, Leverage, And Dividend CoverageSep. 30, 2020 3:02 AM ET|| Includes: CVS, T, UNPby: Ray MerolaRay Merola Value, Dividend Investing, Growth At Reasonable Price, ContrarianSummaryThis article outlines how investors analyze debt, debt leverage, and dividend coverage.
Three stocks are used as examples: AT&T, CVS Health, and Union Pacific.
These stocks were selected because of their differences. It adds color and context to the process.
When examined side by side, you may be surprised by some data points revealed. I certainly was surprised.
The year 2020 hasn't been kind to corporate balance sheets.
The COVID-19 global pandemic pressured many businesses; forcing incremental borrowing in the face of declining earnings, EBITDA, and cash flow. In turn, many investors are noodling upon renewed due diligence around:
Debt
Debt leverage
Dividend coverage
In this article, we will look at these fundamental concepts, pick apart some specific “tells” versus sweeping generalizations, and highlight three well-known, large-cap stocks in the process.
Our Trio of Example Stocks
I've selected three stocks to highlight our walk down Wall Street. These companies are dissimilar, residing in differing sectors / industries, but each have a focus on debt, leverage, and dividends.
AT&T Inc. (T) is a downtrodden and oft-maligned telecommunications and internet company. AT&T management, through a series of acquisitions, is accused of piling up enormous, unsustainable debt, thereby jeopardizing this Dividend Aristocrat's 35-year string of uninterrupted increases. Clearly, management is focusing upon debt and leverage, while maintaining the dividend is secure. Currently, it appears Mr. Market isn't buying it.

CVS Health Corporation (CVS), another criticized business, borrowed to acquire Aetna, a health insurance company. CVS management seeks to become a local, end-to-end health and... Read more