Six Flags: Why I Love This 6.6%-Yielding ‘F’ Rated Stock

Not all stocks in my Oxford Income Letter portfolios are rated “A” and “B” for dividend safety. Some of them have lower ratings, which understandably confuses readers.

Six Flags Entertainment (NYSE: SIX) is a perfect example.

In 2018, earnings were a bit higher and revenue rose to a record for the ninth straight year. However, free cash flow declined by nearly $50 million to $258.4 million.

I dug into the statement of cash flow to try to figure out why it was lower if earnings had actually increased slightly.

The main reasons were an increase in accounts receivable, a decline in stock-based compensation and 2017’s loss on debt extinguishment.

Let me explain…

Accounts receivable refers to outstanding debts that customers owe to a company, sometimes from making purchases on credit. When accounts receivable increases, cash flow declines. That’s because the company did not actually receive the cash that it logged as revenue, so it must be removed from cash flow.

If a company has stock-based compensation, it issues shares to employees and takes that amount as an expense off its profit. However, because the company does not pay cash to its employees, that expense is added back to cash flow.

In Six Flags’ case, the opposite happened. It had expensed stock that was going to be given to employees and added the cash back to cash flow in 2016.

However, in 2017 and 2018, goals that would have triggered the stock-based compensation were not reached, so the stock was not given, the expense was reversed, and the figure that was added back to cash flow in 2016 was removed in 2017 and 2018. Last year, that resulted in a $47 million reversal in cash flow.

Lastly, in 2017, the company took a loss when it extinguished $37 million in debt. Keep in mind that cash had already gone out the door when the debt was paid off. So in 2017, Six Flags took an accounting charge against its profits and added the $37 million back to cash flow in order to represent its actual cash situation.

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