Prior to the 2008-2009 downturn many companies took on enormous levels of debt, usually for one of these two reasons:
I. Fund An Acquisition
Debt has been relatively cheap for some time and easy to access. When the market is roaring and buyers stock is overpriced, sellers will demand significant levels of cash to close the deal. Often debt is used used to raise the cash and the target company's free cash is expected to pay back the debt over time.II. 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, before the 2008/2009 downturn some 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.)Having low levels of debt provides companies with greater financial flexibility. 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.
This week week, I screened my dividend growth stocks database for stocks with:
- Debt to total capital less than 35%
- Positive FCF Payout of 60% or lower
- Market Cap. greater than $2 billion
- Dividend growth of 4% or higher
- Dividend yield of 2.5% or higher
Selected results are presented below:
Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device, and consumer products industries. Yield: 2.6%
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. Yield: 2.9%
Walgreens Boots Alliance, Inc. (WBA) is the largest U.S. retail drug chain in terms of revenues, this company operates more than 8,000 drug stores throughout the U.S. and Puerto Rico. Yield: 2.9%
MEC Industrial Direct (MSM) is a direct marketer that offers a range of industrial products to customers throughout the U.S.; it focuses on maintenance, repair and operations (MRO) supplies. Yield: 3.0%
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. Yield: 3.2%
Franklin Resources Inc. (BEN) is one of the world's largest asset managers, serving retail, institutional and high-net-worth clients. Yield: 3.3%
Phillips 66 (PSX), spun off from ConocoPhillips in 2012, is one of the largest independent refiners and marketers of petroleum products in the U.S. Yield: 3.3%
Eaton Corporation PLC (ETN) is a diversified industrial company makes electrical systems and components for power management, truck transmissions and fluid power systems, and provides services for industrial, mobile and aircraft equipment. Yield: 3.6%
As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor dividend fundamentals. However some of the others may be worth additional due diligence.
My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 200+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have had a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.
Full Disclosure: Long JNJ, TROW, BEN, WBA, ETN,
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