Wednesday, March 7, 2018

5 Stocks With A Low Debt To Total Capital

If the goal of dividend investing is to find and buy dividend stocks that will continue to raise their dividends, it is not enough to only look at a company's free cash flow. Many companies generate significant free cash flow, but often that cash is already spoken for in the form of debt obligations.

To gauge how levered a company is, the metric I like to look at is debt to total capital. Debt includes both long-term and short-term debt and is readily available on the liabilities side of the balance sheet. Total capital is a combination of debt and shareholders equity. When you divide debt by total capital a desirable rate is something less than 35%, but I will consider rates up to 50% on a short-term basis.

Many investors look at a return on equity (ROE) when evaluating a company. I have never liked this metric since it ignores debt portion of invested capital. From an ROE approach a highly levered company could show a good return but not be performing well. My preferred return calculation is Free Cash Flow as a percent of Total Capital Employed.

Below are several companies that with a Debt to Total Capital less than 35%:

Texas Instruments Inc. (TXN) is one of the world's largest manufacturers of semiconductors, this company also produces scientific calculator products and DLP products for TVs and video projectors.
Total Capital: 25% | Yield: 2.3%

Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device, and consumer products industries.
Total Capital: 32% | Yield: 2.6%

Cincinnati Financial Corp. (CINF) is an insurance holding company that primarily markets property and casualty coverage. It also conducts life insurance and asset management operations.
Total Capital: 10% | Yield: 2.8%

Erie Indemnity Co. (ERIE) is a management services company that provides sales, underwriting, and policy issuance services to the policyholders of Erie Insurance Exchange in the United States.
Total Capital: 5% | Yield: 3.0%

Mercury General Corp. (MCY), operating primarily in California, writes a full line of automobile coverage for all classifications of risk.
Total Capital: 17% | Yield: 5.5%

Full Disclosure: Long TXN, ERIE, CINF, JNJ, MCY. See a list of all my Dividend Growth Portfolio holdings here.

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