Tuesday, December 29, 2009

* 7 Low-Debt High-Rated Dividend Stocks

When selecting a dividend growth stock there is really only one factor that is important - sustainability. As we evaluate many aspects of a company, what we are really trying to determine is if the company can continue to raise its dividend indefinitely into the future. To pay and raise its dividend a company must generate sufficient free cash flow. However, it is not enough to just generate the cash, it has to be available for dividend payments.

One of the largest uses for cash is to repay debt and its associated interest. Prior to the most recent downturn many companies took on enormous levels of debt, usually for one of these two reasons:
  1. Fund An Acquisition: Debt has been relatively cheap for some time and easy to access. When sellers thought the buyers stock was overpriced, they would demand significant levels of cash to close the deal. Debt was often used to raise the cash.
  2. Restructuring: Analysts that follow companies have a target debt to total capital they are looking for. If they consider it is too low, management is encouraged to issue debt and use the proceeds to purchase their stock. (As an aside, I own a company that was encouraged to do this and eventually issued debt and purchased their stock close to its high. Then when the economy turned down they had to raise operating cash by, you guessed it, issuing stock well below where they purchased it.)
One of the key metrics I look for when evaluating a company is a debt to total capital ratio of 45% or less. Below are seven dividend companies with a debt to total capital less than 30%:

Nucor Corporation (NUE) is engaged in the manufacture and sale of steel and steel products. As the largest minimill steelmaker in the U.S., Nucor has one of the most diverse product lines of any steelmaker in the Americas. [Analysis]
  • Debt to Total Capital: 29%
  • Current Rating: 4-Stars
Aflac Incorporated (AFL) engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan. [Analysis]
  • Debt to Total Capital: 29%
  • Current Rating: 4-Stars
Becton, Dickinson and Co. (BDX) provides a wide range of medical devices and diagnostic products used in hospitals, doctors' offices, research labs, and other settings. [Analysis]
  • Debt to Total Capital: 27%
  • Current Rating: 5-Stars
Johnson & Johnson (JNJ) engages in the manufacture and sale of various products in the health care field worldwide. [Analysis]
  • Debt to Total Capital: 25%
  • Current Rating: 4-Stars
Harleysville Group Inc. (HGIC) is a regional holding company for property and casualty insurance companies that operates in 32 states, primarily in the eastern half of the U.S.
  • Debt to Total Capital: 13%
  • Current Rating: 4-Stars
RLI Corp (RLI), based in Peoria, IL, provides selected property, casualty and surety insurance. [Analysis]
  • Debt to Total Capital: 12%
  • Current Rating: 4-Stars
Raven Industries Inc. (RAVN) manufacturer provides electronic precision-agriculture products, reinforced plastic sheeting, electronics manufacturing services, specialty aeronautics, and sewn products.
  • Debt to Total Capital: 0%
  • Current Rating: 4-Stars
Having low levels of debt provides companies with greater financial flexibility. Of coarse, we must look at more than just debt as we evaluate a company, but the above can serve as a good starting point for your review.

Full Disclosure: Long NUE, AFL, JNJ. See a list of all my income holdings here.
(Photo Credit)

Tags: [AFL] [BDX] [HGIC] [JNJ] [NUE] [RAVN] [RLI]