Wednesday, February 14, 2018

4 Dividend Stocks With Room To Increase Their Payout

I currently track over 200 dividend growth stocks in my D4L-Database and have determined some of the lower rated stocks could be buys if the companies simply chose to increase their dividends. For various reasons their management has elected keep a low payout ratio and deploy the excess cash elsewhere.

To identify the companies with ample room to increase their dividend payout, I used the following criteria:
  • A Free Cash Flow Dividend Payout (FCFp) of 40% or less. This means that 60% of the company's cash, after operating expenses, is going elsewhere.
  • A sum of Debt to Total Capital (Debt) + FCFp of less than 55%. This should help weed out the companies holding the cash to pay interest.
  • Trailing 12-month Free Cash Flow per share is greater than an average of the last 3 years. This weeds out companies where cash flow is decreasing.
  • Cash on the balance sheet in excess of short-term debt. This weeds out companies that may have an immediate debt-servicing need for the cash.
  • Yield greater than 2.0%.
Here are the stocks meeting the above criteria:

Brady Corp. (BRC) operates as an international manufacturer and marketer of identification solutions and specialty products which identify and protect premises, products and people.
- FCF Payout: 33.1%
- Debt + FCFp: 44.8%
- Cash/ST Debt: 189.9 times
- Yield: 2.3%

Infinity Property and Casualty Corp. (IPCC) provides personal automobile insurance with a concentration on nonstandard auto insurance.
- FCF Payout: 16.8%
- Debt + FCFp: 44.4%
- Cash/ST Debt: n/a (no ST debt)
- Yield: 2.4%

Aflac Incorporated (AFL) provides supplemental health and life insurance in Japan and the U.S. Products are marketed at work sites and help fill gaps in primary coverage.
- FCF Payout: 10.8%
- Debt + FCFp: 31.6%
- Cash/ST Debt: n/a (no ST debt)
- Yield: 2.5%

Weyco Group, Inc. (WEYS) designs and markets footwear for men, women and children under various brand names, including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters and Umi.
- FCF Payout: 26.4%
- Debt + FCFp: 28.7%
- Cash/ST Debt: 1.4 times
- Yield: 3.0%

You could view this from a positive perspective and say the above dividends should be very safe and the companies are in an excellent position to continue to raising them each year. In dividend investing, cash is king, but at some point management has to be willing to share it with the company's owners.

Full Disclosure: Long AFL in my Dividend Growth Stocks Portfolioand IPCC in my High Dividend Growth Stock Portfolio. See a list of all my Dividend Growth Portfolio holdings here.

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