Cash Available for Distribution (CAD), also sometimes called Adjusted Funds From Operations (AFFO), is a performance measure used to gauge the actual cash a company has on hand to pay its dividends (or distributions) to shareholders. It's particularly popular with income-generating businesses like Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs). Think of it as a company's “true” dividend-paying power. Unlike standard accounting metrics like Net Income, which can be misleading due to non-cash expenses, CAD focuses on the real cash flowing in and out of the business. For a value investor hunting for reliable income streams, CAD is a critical tool. It cuts through the accounting noise to answer a simple but vital question: can this company really afford the dividend it's promising?
This is a fantastic question! On the surface, it seems like a company's profit (Net Income) should tell you everything you need to know. The problem is that standard accounting rules, known as GAAP (Generally Accepted Accounting Principles), require companies to subtract non-cash expenses, the biggest of which is usually depreciation. Imagine you own an apartment building. Each year, accounting rules say your building is getting older and losing value, so you have to record a “depreciation expense,” which reduces your reported profit. But did you actually spend that money? No! Your tenants still paid their rent in cold, hard cash. Your bank account is full, but your income statement might show a lower profit or even a loss. CAD is designed to fix this mismatch. It adds back non-cash charges like depreciation and amortization to give you a clearer picture of the actual cash the business is generating.
While companies can have slight variations (always check their reports!), the journey to finding CAD usually starts with a metric called Funds From Operations (FFO). The calculation then makes a crucial adjustment for the real-world costs of maintaining assets.
A common way to calculate CAD is: CAD = Funds From Operations (FFO) - Recurring Capital Expenditures Let's break that down:
For a value investor, CAD isn't just a number; it's a lie detector for a company's dividend. It helps you assess the quality and sustainability of that income stream.
Once you have the CAD, you can calculate one of the most powerful ratios for an income stock: the CAD Payout Ratio. Payout Ratio = Total Dividends Paid / Cash Available for Distribution This ratio tells you what percentage of its available cash the company is returning to shareholders.
A word of caution: CAD is a non-GAAP metric. This means there isn't a universally mandated formula. Companies have some wiggle room, especially in how they define “recurring” CapEx versus “growth” CapEx. A company might try to flatter its CAD figure by classifying necessary maintenance costs as growth investments. As a savvy investor, your job is to be a skeptic. Always dig into the company's quarterly supplemental reports (usually found on their investor relations website). See how they calculate CAD and question their assumptions. A consistent, conservative approach to calculating CAD is often the hallmark of a well-managed company that respects its shareholders.