Investing in companies that regularly raise dividends provides security in an uncertain market and means higher returns ahead. I have searched for very profitable companies that pay rich dividends and that raise their payouts significantly each year. Those stocks would have to show stable financial conditions and generate strong free cash flow.
I have elaborated a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research.
The screen's formula requires all stocks to comply with all following demands:
1. The stock is included in the Russell 3000 index. Russell Investment explanation:
The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.
2. Earnings growth estimates for the next 5 years (per annum) is greater than 15%.
3. Price to free cash flow is less than 17 (many investors prefer using free cash flow instead of net income to measure a company's financial performance, because free cash flow is more difficult to manipulate. Free cash flow is the operating cash flow minus capital expenditure).
4. Dividend yield is greater than 1.6%.
5. Annual rate of dividend growth over the past five years is greater than 10%.
6. The payout ratio is less than 41%
7. The PEG ratio is less than 1.10.
After running this screen on December 05, 2012, before the market open, I obtained as results the 4 following stocks:
Herbalife Ltd. (HLF)
Herbalife Ltd., a network marketing company, sells weight management, nutritional supplement, energy, sports and fitness, and personal care products worldwide.
Herbalife Ltd. has a low trailing P/E of 12 and a very low forward P/E of 10.23, it has also a very low PEG ratio of 0.77. The average annual earnings growth for the past 5 years was very high at 28.03 and the average annual earnings growth estimates for the next 5 years is quite high at 15.58%. The forward annual dividend yield is quite high at 2.58% and the payout ratio is only 27.1%. The company is trading 35% below its 52-week high and has 69% upside potential based on the consensus mean target price of $78.63. Analysts are very bullish on the stock; among the nine analysts covering the stock, seven rate it as a strong buy and two rate it as a buy. On November 29, Richard Goudis, chief operating officer of the company, purchased 45,516 shares of HLF, for a cost of $43.89 each, for a total investment of $2.0 million. The compelling valuation metrics, the strong analyst's recommendation and the fact that insiders are buying the HLF stock, all these factors make the stock very attractive.
Kaiser Aluminum Corporation (KALU)
Kaiser Aluminum Corporation, together with its subsidiaries, engages in the production and sale of semi-fabricated specialty aluminum products.
Kaiser Aluminum Corporation has a low debt (total debt to equity is only 0.37) and the current ratio is very high at 4.80. KALU has a low trailing P/E of 14.36 and a low forward P/E of 14.03, it has also a low PEG ratio of 0.96. The price to free cash flow for the trailing 12 months is very low at 12.55 and the average annual earnings growth estimates for the next 5 years is quite high at 15%. The forward annual dividend yield is at 1.64% and the payout ratio is only 23.9%. Analysts recommend the stock; among the six analysts covering the stock, two rate it as a strong buy, three rate it as a buy and only one rates it as a hold. The stock price is 1.80% above its 20-day simple moving average, 2.02% above its 50-day simple moving average and 15.26% above its 200-day simple moving average, which indicates short-term, mid-term and long-term uptrend. On October 24, Kaiser Aluminum reported its 3Q financial results (here). On this occasion Jack A. Hockema, President, CEO and Chairman said:
We are very pleased with our third-quarter results as we continued to benefit from strong aerospace and automotive demand, improved pricing and increased overall operating leverage continuing the trend experienced in the first half of 2012 .
The KALU stock looks quite attractive.
Insperity, Inc. (NSP)
Insperity, Inc. provides an array of human resources and business solutions to help enhance business performance for small and medium-sized businesses.
Insperity has no debt at all and it has a forward P/E of 16.48 and a very low PEG ratio of 0.84. The price to free cash flow for the trailing 12 months is at 16.17 and the average annual earnings growth estimates for the next 5 years is very high at 22.67%. The forward annual dividend yield is very high at 2.19% and the payout ratio is at 40.6%. The stock price is 9.50% above its 20-day simple moving average, 16.21% above its 50-day simple moving average and 15.99% above its 200-day simple moving average. On November 01, Insperity, Inc. reported results for the third quarter and nine months ended Sept. 30, 2012 (here). For the third quarter, the company reported net income of $11.5 million and diluted earnings per share of $0.45. For the nine months ended Sept. 30, 2012, the company reported net income of $31.0 million and diluted earnings per share of $1.20. Paul J. Sarvadi, Insperity chairman and chief executive officer said:
We are pleased with our excellent third quarter and year-to-date financial results achieved while implementing a new growth strategy for Insperity. Now that all of the major elements of our business transformation are in place, we can focus our efforts and resources on the growth acceleration.
All these factors make the NSP stock quite attractive.
Wyndham Worldwide Corporation (WYN)
Wyndham Worldwide Corporation provides various hospitality products and services to individual consumers and business customers in the United States and internationally.
Wyndham Worldwide Corporation has a trailing P/E of 19.51 and a low forward P/E of 13.74. The PEG ratio is quite low at 1.05. The price to free cash flow for the trailing 12 months is very low at 11.31 and the average annual earnings growth estimates for the next 5 years is quite high at 18.60%. The forward annual dividend yield is at 1.85% and the payout ratio is only 33.6%. Analysts recommend the stock; among the 14 analysts covering the stock, four rate it as a strong buy, seven rate it as a buy and three rate it as a hold. On October 24, Wyndham Worldwide reported its 3Q financial results (here). Third-quarter adjusted diluted earnings per share was $1.13, compared with $0.94 in the third quarter of 2011, an increase of 20%. Third-quarter 2012 reported diluted EPS was $1.11, compared with $1.08 from the same period in 2011, which included a $22 million benefit from adjustments. During the quarter, the company repurchased 2.6 million shares of its common stock for $133 million. All these factors make the WYN stock quite attractive.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.