Payout ratio is the percentage of a company's earnings paid out to investors as cash dividends. The lower the payout ratio, the more secure is the dividend because smaller dividends are easier to pay out than larger dividends.
I have searched for very profitable high-growth companies that pay rich dividends and have a low payout ratio. These kinds of stocks offer limited downside and provide a very nice income.
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. Average annual earnings growth for the past 5 years was greater than 23%.
2. Average annual earnings growth estimates for the next 5 years is greater than 17%.
3. Price to free cash flow is positive.
4. Total debt is zero.
5. The PEG ratio is less than 1.10.
6. Dividend yield is greater than 2.3%.
7. The payout ratio is less than 20%.
After running this screen on December 07, 2012, before the market open, I obtained as results the 3 following stocks:
|Company||Symbol||Last price||Market Cap ($millions)||Trailing P/E||Forward P/E||PEG Ratio|
|Brooks Automation Inc.||BRKS||7.73||513||3.72||15.46||0.21|
Brooks Automation Inc. (BRKS)
Brooks Automation, Inc. provides automation, vacuum, and instrumentation solutions for semiconductor manufacturing, life sciences, and technology device manufacturing markets worldwide.
Brooks Automation Inc. has no debt at all and the trailing P/E is very low at 3.72. The PEG ratio is extremely low at 0.21 and the price to sales ratio is also very low at 0.99. The average annual earnings growth for the past 5 years was very high at 23.21 and the average annual earnings growth estimates for the next 5 years is also high at 18%. The forward annual dividend yield is quite high at 4.14% and the payout ratio is only 15.5%. On November 8, Brooks Automation reported results for its fiscal fourth quarter and full year ended September 30, 2012 (found here). For the quarter, Brooks Automation reported sales of $119.4 million, down from $131.0 million a year ago, but ahead of the Street estimate of $116.0 million. GAAP EPS of $1.77 for Q4 was much higher than the prior-year quarter's $0.18 per share. Steve Schwartz, President and Chief Executive Officer of Brooks explained the growth program of the company:
We utilized our financial strength shortly after the quarter end to acquire Crossing Automation, Inc., which provides automation products primarily to global Semiconductor Front End markets. This acquisition will immediately contribute to our top and bottom line during fiscal 2013. Crossing has a product and customer franchise that is complementary to Brooks and the acquisition will meaningfully expand Brooks' capabilities in atmospheric automation.
The compelling valuation metrics, the strong growth prospects, the rich dividend and the fact that the BRKS stock is selling way below its book value (price to book value is only 0.79); all these factors make the BRKS stock very attractive.
(click to enlarge)
Digimarc Corporation (DMRC)
Digimarc Corporation provides media identification and management solutions to commercial entities and government customers in the United States and internationally.
Digimarc Corporation has no debt at all and the forward P/E is quite low at 13.57. The PEG ratio is quite low at 1.01 and the current ratio is very high at 9.14. The average annual earnings growth for the past 5 years was very high at 46.69 and the average annual earnings growth estimates for the next 5 years is also high at 17.33%. The price to free cash flow for the trailing 12 months is very low at 8.90. The forward annual dividend yield is at 2.33% and the payout ratio is only 10.2%. The company is trading 40.4% below its 52-week high and has 109% upside potential based on the consensus mean target price of $39.50. Analysts recommend the stock; among the three analysts covering the stock, two rate it as a strong buy and one rates it as a buy. On October 25, Digimarc reported its 3Q financial results. Revenues for the third quarter of 2012 increased 4% to $8.9 million from $8.6 million in the same quarter a year ago. Net income for the third quarter of 2012 increased 57% to $1.0 million or $0.14 per diluted share. This compared to net income of $639,000 or $0.09 per diluted share in the third quarter of 2011. In pursuit of growth, on December 4, Digimarc announced it has acquired Attributor Corp. for an undisclosed amount. Attributor of San Mateo, Calif., makes software and services that protect eBook publishers and authors from piracy, which is predicted to become a much bigger problem in coming years with proliferation of tablets and other e-reader devices. The compelling valuation metrics, the strong growth prospects, the analyst's recommendation and the rich dividend; all these factors make the DMRC stock very attractive.
Questcor Pharmaceuticals, Inc. (QCOR)
Questcor Pharmaceuticals, Inc., a biopharmaceutical company, provides prescription drugs for the treatment of multiple sclerosis, nephrotic syndrome, and infantile spasms indications.
Questcor has no debt at all and it has a very low trailing P/E of 10.12 and even lower forward P/E of 6.52 and an extremely low PEG ratio of 0.30. The average annual earnings growth for the past 5 years was very high at 38.05 and the average annual earnings growth estimates for the next 5 years is also very high at 33.50%. The price to free cash flow for the trailing 12 months is very low at 9.31. The forward annual dividend yield is quite high at 3.03% and the payout ratio is only 7.0%. The company is trading 54.8% below its 52-week high and has 59% upside potential based on the consensus mean target price of $41.86. On October 23, Questcor Pharmaceuticals reported its 3Q financial results. The company beat expectations on both top and bottom lines. Compared to the prior-year quarter, sales and EPS grew significantly and margins expanded across the board. The very low multiples and the high dividend yield make QCOR stock quite attractive.