Cash Cow Clues: Can Dividend Yields Forecast Interest Rates?

Michael LebowitzAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

I have written many articles and commentaries forecasting interest rates. The analysis has used prior and current inflation and economic activity. Additionally, I have looked at market data on inflation expectations, Fed Funds futures, and other factors that influence interest rates. Today, I add an unorthodox factor to the list: cash cows.

This article introduces a unique way to imply where dividend investors think interest rates will be in the future. The impetus for this article came from a recent SimpleVisor Friday Favorites article in which I reviewed the Campbell Soup Company (CPB). Friday Favorites typically analyzes a company’s fundamental and technical conditions and valuations.

This time, however, because the company was a cash cow, we took it further and studied its dividend yield. In the process, we arrived at an implied 10-year U.S. Treasury yield based on the current and historical spread between Campbell’s dividend yield and the 10-year U.S. Treasury yield.

Implying future interest rates based on CPB is somewhat laughable. However, implying future interest rates on a larger population of cash cows may be more telling.

What is a cash cow?

Cash cow is a term dairy farmers use to describe mature cows that generate milk regularly with minimum maintenance.

Wall Street adopted the term cash cow to label companies that deliver reliable cash flows (milk), require little investment (maintenance), and have little to no sales and earnings growth (mature).

CPB is a good example of a cash cow. Not surprisingly, the soup business is a low-growth venture; therefore, it has negligible earnings and sales growth. Moreover, it has consistently paid dividends since 1989 and produces plenty of excess cash flow that should ensure future dividend payments.

While CPB lives up to the definition of a cash cow, I do not analyze it in this article as its dividend yield is below my threshold dividend yield. However, I did find fifteen other cash cows, which I will share.

Screening for cows

In this analysis, I used the following screening criteria:

  • Market Cap > $10 billion
  • Five-Year EPS Growth < five percent
  • Five-Year Sales Growth < five percent
  • Dividend Yield > 2.50 percent
  • Ten Years of Consecutive Dividend Payments

The table below shows the fifteen stocks that met the screening criteria.

table