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Arie Goren, Portfolio123 (470 clicks)
Long only, value, research analyst, dividend investing
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Fast-growing companies usually do not pay dividends because they need to reinvest all the cash they generate back into the business. But some fast-growing companies generate plenty of cash so they can afford to pay out profits as dividends to shareholders

I have searched for very profitable companies with very strong growth prospects that pay dividends. Those stocks would have to show a very low debt and a very low price to free cash flow ratio.

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. Price to free cash flow is less than 11, (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).

  2. The PEG Ratio is less than 1.20.

  3. Total debt to equity is less or equal to 0.05.

  4. Average annual sales growth for the past 5 years is greater than 15%.

  5. Average annual earnings growth for the past 5 years is greater than 15%.

  6. Average annual earnings growth estimates for the next 5 years is greater than 15%.

  7. Dividend yield is greater than 2.0%.

  8. The payout ratio is less than 40%.

  9. The Enterprise Value is less than the Market Cap of the company, (Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. Since the enterprise value can serve as the theoretical takeover price of the company, when its value is well below the market cap it is possible to consider the company's stock in a deep discount).

After running this screen on January 30, 2013, before the market open, I discovered the following three stocks:

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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 it has a trailing P/E of 20.03, and a forward P/E of 17.73, the PEG ratio is at 1.16. The price to free cash flow for the trailing 12 months is very low at 10.21, and the current ratio is very high at 9.14. DMRC records strong growth on all key parameters; the average annual sales growth for the past 5 years was very high at 26.62%, the average annual earnings growth for the past 5 years was also very high at 46.69% and the average annual earnings growth estimates for the next 5 years is quite high at 17.33%.

DMRC pays dividends; the forward annual dividend yield is at 2.03% and the payout ratio is only 30.6%. 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. The company is trading 31.6% below its 52-week high and has 136% upside potential based on the consensus mean target price of $51.00.

DMRC will report its latest quarterly financial results on February 21. DMRC is expected to post a profit of $0.17 a share, a 183% rise from the company's actual earnings for the same quarter a year ago. The reported results will probably affect the stock price in the short term.

The compelling valuation metrics, the strong growth prospects, the 136% upside potential based on the consensus mean target price of $51.00, and the fact that the company pays dividends are all factors that make DMRC stock quite attractive.

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Chart: finviz.com

IAC/InterActiveCorp (IACI)

IAC/InterActiveCorp engages in the internet business in the United States and internationally.

IAC/InterActiveCorp has a very low debt (total debt to equity is only 0.05), and its forward P/E is very low at 10.87, and it has a very low PEG ratio of 0.79. The price to free cash flow for the trailing 12 months is very low at 10.74. IACI records strong growth on all key parameters; the average annual sales growth for the past 5 years was quite high at 15.53%, the average annual earnings growth for the past 5 years was also quite high at 18.52% and the average annual earnings growth estimates for the next 5 years is very high at 28.20%.

IACI pays dividends; the forward annual dividend yield is at 2.36% and the payout ratio is only 39.3%. The company is trading 26.4% below its 52-week high and has 48% upside potential based on the consensus mean target price of $60.13. Among the seventeen analysts covering the stock, five rate it as a strong buy, seven rate it as a buy, four rate it as a hold and one rates it as an underperform.

IACI will report its latest quarterly financial results on February 05. IACI is expected to post a profit of $0.78 a share, a 11.4% rise from the company's actual earnings for the same quarter a year ago. The reported results will probably affect the stock price in the short term.

The compelling valuation metrics, the strong growth prospects, the 48% upside potential based on the consensus mean target price of $60.13, and the fact that the company pays dividends are all factors that make IACI stock quite attractive.

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Chart: finviz.com

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 9.80, and even a lower forward P/E of 6.49, and an extremely low PEG ratio of 0.29. QCOR records strong growth on all key parameters; the average annual sales growth for the past 5 years was very high at 76.36%, the average annual earnings growth for the past 5 years was also very high at 38.05% and the average annual earnings growth estimates for the next 5 years is very high at 33.50%. The price to free cash flow for the trailing 12 months is very low at 9.02.

QCOR pays dividends; the forward annual dividend yield is quite high at 3.13% and the payout ratio is only 15.3%. The company is trading 55.9% below its 52-week high and has 64% upside potential based on the consensus mean target price of $41.86.

QCOR will report its latest quarterly financial results on February 18. QCOR is expected to post a profit of $0.99 a share, a 106% rise from the company's actual earnings for the same quarter a year ago. The reported results will probably affect the stock price in the short term.

The compelling valuation metrics, the strong growth prospects, the 106% upside potential based on the consensus mean target price of $41.86, and the fact that the company pays dividends are all factors that make QCOR stock quite attractive.

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Chart: finviz.com

Source: 3 Fast-Growing Companies That Pay Dividends