Tuesday, March 1, 2022

3 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%:

Medtronic PLC (MDT) is a global medical device manufacturer with leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management and other medical markets.
Debt Total Capital: 32.9% | Yield: 2.4%

T. Rowe Price Group Inc. (TROW) operates one of the largest no-load mutual fund and life cycle fund complexes in the United States, with June 30 AUM of $776.6 billion.
Debt Total Capital: 1.7% | Yield: 3.4%

Community Trust Bank Corp. (CTBI) owns and operates Community Trust Bank, Inc., which provides commercial banking services in Kentucky, Tennessee and West Virginia; and a trust company.
Debt Total Capital: 9.4% | Yield: 3.7%

Full Disclosure: Long TROW, CTBI,

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