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Are you a value investor looking to add industrial companies to your 2013 portfolio? Would these stocks be more attractive if they paid a dividend? If so, we researched stocks that might interest you.

We researched industrial stocks that paid a dividend of at least 1% but not more than 5%. This allowed us to stay away from the high yield space.

Additionally, we looked for those industrial companies that appear undervalued relative to their cash flows, indicated by high ratios of levered free cash flow/enterprise value.

Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm's value from all ownership sources: market cap, outstanding debt, and preferred shares. When companies have ratios of levered free cash flow/enterprise value in excess of 10%, it may indicate that the company as a whole is being undervalued.

This ratio gives us the money that the business can use to grow and pay dividends to shareholders. Any possibility of a dividend payout nowadays is looked at positively.

Our final list consisted of 6 industrial stocks.

A Closer Look

We looked at Electro Scientific Industries Inc. (NASDAQ:ESIO) in more detail. The stock trades around $10.61 versus its 52-week range of $10.59-$10.82, down 13% in the past 1-year. The stock yields 3%. The company's competitor GSI Group (NASDAQ:GSIG) trades around $9.55, down 19% in the past 1-year. GSI Group does not pay a dividend.

As of December 29th, 2012, the company has cash and short-term investments of $143 million, and no public debt. Additionally, the company generated $25 million in free cash flow in the quarter ended December 29th, 2012.

On December 3rd, 2012, management decided to return additional cash to shareholders in the form of a special dividend of $2.00 per share.

Here is a stock with a strong balance sheet, history of returning cash to shareholders, and undervalued by levered free cash flow.

Should you be investing in Electro Scientific Industries?

The List

For an ‪interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.

Do you think these industrial stocks look attractive? Use this list as a starting point for your own analysis.

1. Albany International Corp. (NYSE:AIN): Manufactures and sells paper machine clothing and industrial doors worldwide.

  • Market cap at $815.14M, most recent closing price at $26.23.
  • Levered free cash flow at $136.20M vs. enterprise value at $947.76M (implies a LFCF/EV ratio at 14.37%).
  • Dividend yield at 2.13%.

2. Electro Scientific Industries Inc. : Provides high-technology manufacturing equipment to the semiconductor and micro-electronics markets.

  • Market cap at $320.17M, most recent closing price at $10.83.
  • Levered free cash flow at $19.08M vs. enterprise value at $172.42M (implies a LFCF/EV ratio at 11.07%).
  • Dividend yield at 2.95%.

3. General Dynamics Corp. (NYSE:GD): Provides business aviation, combat vehicles, weapons systems and munitions, military and commercial shipbuilding, and communications and information technology products and services worldwide.

  • Market cap at $23.61B, most recent closing price at $66.82.
  • Levered free cash flow at $2.97B vs. enterprise value at $23.91B (implies a LFCF/EV ratio at 12.42%).
  • Dividend yield at 3%.

4. L-3 Communications Holdings Inc. (NYSE:LLL): Provides command, control, communications, intelligence, surveillance, and reconnaissance systems; aircraft modernization and maintenance; and government services in the United States and internationally.

  • Market cap at $7.24B, most recent closing price at $77.67.
  • Levered free cash flow at $1.08B vs. enterprise value at $10.28B (implies a LFCF/EV ratio at 10.51%).
  • Dividend yield at 2.8%.

5. Northrop Grumman Corporation (NYSE:NOC): Provides products, services, and solutions in aerospace, electronics, information systems, shipbuilding, and technical service sectors.

  • Market cap at $15.7B, most recent closing price at $65.09.
  • Levered free cash flow at $2.08B vs. enterprise value at $15.65B (implies a LFCF/EV ratio at 13.29%).
  • Dividend yield at 3.3%.

6. Schnitzer Steel Industries Inc. (NASDAQ:SCHN): Engages in recycling ferrous and nonferrous scrap metals, and used and salvaged vehicles; and manufacturing finished steel products.

  • Market cap at $778.8M, most recent closing price at $29.63.
  • Levered free cash flow at $227.61M vs. enterprise value at $1.12B (implies a LFCF/EV ratio at 20.32%).
  • Dividend yield at 2.5%.

*FCF data sourced from Yahoo! Finance

Source: 6 Dividend Paying Industrials Undervalued By Levered Free Cash Flow