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$2.98 The real estate investment trusts and tobacco companies look even better on the question of
dividend sustainability when dividends are compared to free cashflows to equity. R.J.
Reynolds, for instance, has free cashflows to equity of $10.75 per share and pays out $3.80
in dividends, suggesting a large buffer for dividend payments. Concerns about lawsuits and
legislation may still sway you in your final investment decision. The biggest divergence
between earnings per share and FCFE shows up with the energy firms. All of the energy
firms have substantially lower free cashflows to equity than earnings per share; five of them
have negative free cashflows to equity. Since FCFE represent cash available for dividends, 36
how, you might wonder, can they afford to pay the dividends that they do? In the late 1990s,
energy firms borrowed money (on and off the books) and made equity issues to fund
dividend payments. As a result, they became highly levered. The conclusion you would
draw is that these firms cannot sustain these divid...
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- Spring '11