Coverage by Free Cash Flow
Compares free cash flow with cash dividends paid to estimate how comfortably cash generation funds distributions.
Formula
FCF Dividend Coverage = Free Cash Flow / Cash Dividends Paid
Worked example$900 million of FCF divided by $300 million of dividends paid gives coverage of 3.0x.
Calculation steps
- Calculate FCF: $900 million.
- Find cash dividends paid: $300 million.
- Divide to get 3.0x coverage.
How to interpret it
Coverage above 1x means current FCF exceeded dividends paid; a wider cushion can absorb volatility or support reinvestment.
Industry context
Capital spending and cash-flow volatility differ by industry. Review multi-year coverage for cyclical and capital-intensive businesses.
Common mistakes
- Use cash dividends paid, not only declared dividends.
- Normalize temporary working-capital swings.
- Do not assume one year of strong coverage guarantees future payments.