Do you prefer stocks that pay dividends you can rely on? If you do, surely you would like to focus on companies that will continue to pay those dividends in the long-term.
With this in mind we began by screening the S&P 500 for dividend stocks: those paying dividend yields between 1%-5%. We wanted to stay conservative so stayed away from the high-risk high yielding stocks above 5%.
We then looked for those stocks 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.
Finally, we looked through the 13F's of companies on our list for those with bearish sentiment from institutional investors, with significant net institutional sales over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these names to underperform.
A Closer Look
We looked at H&R Block, Inc. (HRB) in more detail. The stock trades around $25.10 close to its 52-week high of $25.22, up 65% in the past 1-year. It trades with a P/E multiple of 15 times, and pays a dividend of 3.2%.
As of October 31st, 2012, the company has $1.2 billion in cash and cash equivalents, and $906 million in long-term debt. The table below gives details on long-term debt:
The company is expected to report earnings on March 7th, 2013. According to sell-side analysts, H&R Block is expected to report third quarter 2013 earnings of $0.01, and revenues of $602 million.
For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.
Is the negative sentiment from institutions justified? Use the list below as a starting point for your analysis.
1. CA Technologies (CA): Designs, develops, markets, delivers, licenses, and supports information technology (IT) management software products that operate on a range of hardware platforms and operating systems.
- Market cap at $11.48B, most recent closing price at $25.05.
- Net institutional sales in the current quarter at -29.4M shares, which represents about 8.94% of the company's float of 328.99M shares. The top 2 holders of the stock are NWQ Investment Management, and State Street Capital.
- Levered free cash flow at $1.04B vs. enterprise value at $10.29B (implies a LFCF/EV ratio at 10.11%).
- Dividend yield at 4%.
2. GameStop Corp. (GME): Operates as a retailer of video game products and personal computer (PC) entertainment software.
- Market cap at $3.12B, most recent closing price at $25.37.
- Net institutional sales in the current quarter at -8.7M shares, which represents about 7.32% of the company's float of 118.80M shares. The top 2 holders of the stock are FMR, LLC., and RS Investment Management.
- Levered free cash flow at $486.89M vs. enterprise value at $2.79B (implies a LFCF/EV ratio at 17.45%).
- Dividend yield at 3.94%.
3. H&R Block, Inc. : Provides tax preparation, retail banking, and various business advisory and consulting services.
- Market cap at $6.74B, most recent closing price at $25.10.
- Net institutional sales in the current quarter at -15.9M shares, which represents about 6.44% of the company's float of 247.08M shares. The top 2 holders of the stock are Viking Global Investors, and the Vanguard Group.
- Levered free cash flow at $687.56M vs. enterprise value at $6.87B (implies a LFCF/EV ratio at 10.01%).
- Dividend yield at 3.2%.
*Accounting data sourced from Google Finance, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.