When a company has a long-term track record of consistent and rising dividend payments, it is a clear indicator that the company's financial position is good.
I have searched for very profitable companies that pay rich dividends with a low payout ratio, and that raise their payouts significantly each year. Those stocks would have to show stable financial conditions and generate positive 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 S&P Composite 1500 index. Description from Standard & Poor's:
An investable U.S. equity benchmark, the S&P Composite 1500 combines three leading indices, the S&P 500®, the S&P MidCap 400, and the S&P SmallCap 600 to cover approximately 90% of the U.S. market capitalization. It is designed for investors seeking to replicate the performance of the U.S. equity market or benchmark against a representative universe of tradable stocks.
2. Dividend yield is greater than 3.0%.
3. The payout ratio is less than 50%.
4. The annual rate of dividend growth over the past five years is greater than 8.0%.
5. Average annual earnings growth estimates for the next 5 years is greater than 7%.
6. Trailing P/E is less than 16.
7. Forward P/E is less than 15.
After running this screen on February 04, 2013, before the market open, I discovered the following three stocks:
The Cato Corporation (CATO)
The Cato Corporation operates as a specialty retailer of fashion apparel and accessories in the southeastern United States.
The Cato Corporation has no debt at all, and it has a very low trailing P/E of 12.51 and even a lower forward P/E of 11.91. The PEG ratio is at 1.25, and the price to sales is very low at 0.86. The forward annual dividend yield is quite high at 3.65%, and the payout ratio is at 45.7%. The annual rate of dividend growth over the past five years was at 8.7%.
The stock price is 1.57% above its 20-day simple moving average, 1.71% above its 50-day simple moving average and 2.49% above its 200-day simple moving average, which indicates short-term, mid-term and long-term uptrend.
On January 03, The Cato Corporation reported that December same-store Sales were down 7%, and the company lowered its 4Q EPS guidance. In the report, John Cato, Chairman, President, and Chief Executive Officer, commented:
December same-store sales results were well below expectations and our year-to-date trend. We now expect that fourth quarter earnings per diluted share will be within the range of $0.34 to $0.36, versus our original guidance of $0.38 to $0.42 and $0.35 last year. The Company's estimate for full year earnings per diluted share is now in the range of $2.17 to $2.19 vs. our most recent guidance of $2.22 to $2.26 and $2.21 last year.
Despite the disappointing December same-store sales results, the compelling valuation metrics, the rich dividend and the fact that the stock is in an uptrend are all factors that make CATO stock quite attractive.
Data: Yahoo Finance
General Mills, Inc. (GIS)
General Mills, Inc. manufactures and markets branded consumer foods worldwide.
General Mills has a trailing P/E of 15.55 and quite a low forward P/E of 14.53. The PEG ratio is at 1.96, and the price to free cash flow for the trailing 12 months is at 25.89. The forward annual dividend yield is quite high at 3.13%, and the payout ratio is at 48.7%. The annual rate of dividend growth over the past five years was very high at 11.1%.
The stock price is 1.80% above its 20-day simple moving average, 2.99% above its 50-day simple moving average and 8.10% above its 200-day simple moving average, which indicates short-term, mid-term and long-term uptrend.
On December 19, 2012, General Mills reported its fiscal 2013 second quarter results. General Mills reported a 13% jump in second-quarter earnings and raised its full-year outlook on new products expected for the second half of the year. In the report, chairman and chief executive officer Ken Powell said:
The second-quarter results reflected good performance by each of the company's operating segments. Our U.S. Retail segment posted gains in pound volume, net sales and operating profit. The Bakeries and Foodservice segment generated strong double-digit operating profit growth. And our International segment recorded good sales and profit growth for established businesses in addition to the incremental contributions from Yoki and Yoplait Canada.
The rich dividend, the good fiscal 2013 second quarter results and the fact that the stock is in an uptrend are all factors that make GIS stock quite attractive.
Data: Yahoo Finance
Corning Inc. (GLW)
Corning Incorporated produces specialty glasses, ceramics, and related materials worldwide.
Corning has a very low debt (total debt to equity is only 0.16), and it has a very low trailing P/E of 10.36 and even a lower forward P/E of 9.30. The PEG ratio is very low at 0.86, and the price to book value is very low at 0.80. The price to free cash flow for the trailing 12 months is at 18.87, and the average annual earnings growth estimates for the next 5 years is quite high at 12%. The forward annual dividend yield is quite high at 3.02%, and the payout ratio is only 31.3%. The annual rate of dividend growth over the past five years was very high at 12.5%.
On January 29, Corning reported its results for the fourth quarter and full year of 2012, which beat EPS expectations by $0.01 and beat expectations on revenue.
- Sales were $2.15 billion, a 14% year-over-year increase. The quarter performance reflects the largest quarterly sales in Corning history.
- Earnings per share were $0.34, excluding special items, the company`s first year-over-year quarterly improvement since 2010; GAAP earnings per share were $0.19.
- Specialty Materials sales were up 68% on a year-over-year basis and 10% sequentially, driven by the continued strength of Corning® Gorilla® Glass.
- Telecommunications sales improved 10% over the year-ago period and 3% sequentially.
The compelling valuation metrics, the rich dividend and the good fourth quarter results are all factors that make GLW stock quite attractive.
Data: Yahoo Finance
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLW over the next 72 hours.