Wednesday, April 1, 2009

* Low-Debt Dividend Stocks

With the dramatic market declines over the last 18 months, most dividend stocks appear to be fairly priced on a historic basis. However, when you consider the record number of dividend cuts and near-term prospects, many of the lower valuations are justified. So how do you sort through the massive Dividend Stock list to find the companies worthy of consideration?

One method is to use a stock screen to focus on the stocks with characteristics that we are looking for. Let's put together a stock screen with the following criteria:
  • S&P Index Membership = True : Dividend Aristocrats Are Part of the S&P
  • Debt to Equity Ratio = Low As Possible : Less debt means more cash available for dividends
  • Payout: Latest Fiscal Year <= 50 : Leave a little headroom
  • Current Dividend Yield >= 3 : In today's world 3% yield is a reasonable floor
  • P/E Ratio: Current >=0 : Profitable companies need only to apply
  • 5-Year Dividend Growth >= 5 : Long-term, growing dividends is where we will come out ahead
  • Annual EPS Growth Rate >= 5 : Need to grow earnings to keep growing dividends
  • Return on Invested Capital >= 10 : This keeps the shareholders happy
Entering the above in the MSN Money Stock Screener (works only with Internet Explorer), returns the following 25 companies:
Sym Company Name Yield Payout Debt to Eq.
CVX Chevron Corp 3.71 21.6 0.10
JNJ Johnson & Johnson 3.48 38.8 0.28
VFC VF Corp 4.00 42.3 0.34
MRO Marathon Oil Corp 3.48 19.3 0.34
GD General Dynamics Corp 3.53 22.2 0.40
NUE Nucor Corp 3.41 32.3 0.42
CBE Cooper Industries Ltd 3.62 28.4 0.47
ITW Illinois Tool Works Inc 3.83 38.2 0.48
HAS Hasbro Inc 3.17 36.4 0.52
DOV Dover Corp 3.61 24.3 0.55
SYY Sysco Corp 4.02 46.4 0.60
EMR Emerson Electric Co 4.46 38.3 0.63
ABT Abbott Laboratories 3.45 47.1 0.65
ROK Rockwell Automation Inc 4.67 29.5 0.67
PG Procter & Gamble Co 3.28 37.6 0.67
MMM 3M Co 4.00 40.4 0.68
UTX United Technologies Corp 3.39 25.8 0.72
SUN Sunoco Inc 4.16 17.8 0.76
MCD McDonald's Corp 3.57 42.3 0.76
HON Honeywell International Inc 3.98 29.2 1.17
LMT Lockheed Martin Corp 3.14 22.9 1.33
JWN Nordstrom Inc 3.60 34.4 2.08
IFF International Flavors and Fragrances Inc 3.16 33.1 2.19
AVP Avon Products Inc 4.18 39.0 3.69
K Kellogg Co 3.62 43.1 3.77
The next step is to pick through the list an eliminate companies that are not Aristocrats or Achievers. In addition, I also eliminated one company that was on the list, but failed to raise its dividend over the last 12 months and I eliminated one company whose debt-to-equity ratio was in excess of 1.00. This left us with 14 companies.

Low debt is good, but it is even better when the company is generating significant free cash flows. To further trim the list, I only kept the companies where 2008 free cash flows were the highest over the last 10 years. This left the following 7 companies, listed in ascending order based on their free cash flow compound growth rate (CAGR) from 1999-2008:

Emerson Electric Co (EMR) - FCF CAGR: 9.5%
EMR primarily makes backup power equipment for telecom and Internet providers and users, climate control components, and electric motors. (Analysis)

Sysco Corp (SYY) - FCF CAGR: 10.1%
SYY is the largest U.S. marketer and distributor of foodservice products. (Analysis)

Dover Corp (DOV) - FCF CAGR: 10.4%
DOV manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment. (Analysis)

United Technologies Corp (UTX) - FCF CAGR: 14.1%
This aerospace-industrial conglomerate's portfolio includes Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators, and Carrier air conditioners, among other products. (Analysis)

General Dynamics Corp (GD) - FCF CAGR: 16.4%
GD is the world's sixth largest military contractor and also one of the world's biggest makers of corporate jets. (Analysis)

McDonald's Corp. (MCD) - FCF CAGR: 19.5%
MCD is the largest fast-food restaurant company in the world, with about 32,000 restaurants in 118 countries. (Analysis)

Procter & Gamble Co (PG) - FCF CAGR: 21.3%
PG is a leading consumer products company markets household and personal care products in more than 180 countries. (Analysis)

The above are certainly not buy recommendations, but a good list of candidates worthy of additional analysis. When the market isn't giving you any breaks, a great way to manage risk is to focus on low-debt blue chip dividend stocks.

Full Disclosure: Long SYY, UTX, MCD, PG
(Photo: Steve Woods)

Tags: [DOV] [EMR] [GD] [MCD] [PG] [SYY] [UTX]

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