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:
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. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 33 consecutive years.
Yield: 2.9% | Growth: 6.23% | Debt/Cap: 25.53% | FCF Payout: 10.29%
Genuine Parts Co. (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products. GPC is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion.
Yield: 2.8% | Growth: 6.82% | Debt/Cap: 16.52% | FCF Payout: 37.60%
Microsoft (MSFT), the world's largest software company, develops PC software, including the Windows operating system and the Office application suite. The company has paid a cash dividend to shareholders every year since 2003 and has increased its dividend payments for 14 consecutive years.
Yield: 2.9% | Growth: 15.00% | Debt/Cap: 33.24% | FCF Payout: 50.57%
Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer products industries. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 53 consecutive years.
Yield: 3.0% | Growth: 6.60% | Debt/Cap: 21.63% | FCF Payout: 56.58%
Cisco Systems, Inc. (CSCO) offers a complete line of routers and switching products that connect and manage communications among local and wide area computer networks employing a variety of protocols. The company has paid a cash dividend to shareholders every year since 2011 and has increased its dividend payments for 6 consecutive years.
Yield: 4.1% | Growth: 15.00% | Debt/Cap: 29.10% | FCF Payout: 37.11%
Cummins Inc. (CMI) is a leading manufacturer of truck engines also makes stand-by power equipment and industrial filters. The company has paid a cash dividend to shareholders every year since 1948 and has increased its dividend payments for 11 consecutive years.
Yield: 4.0% | Growth: 20.00% | Debt/Cap: 17.58% | FCF Payout: 51.41%
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 250+ 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 AFL, GPC, MSFT, JNJ, CSCO in my Dividend Growth Stocks Portfolio. See a list of all my dividend growth holdings here.
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Tags: AFL, GPC, MSFT, JNJ, CSCO, CMI,