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 have raised their payouts significantly each year. Those stocks would have to show stable financial conditions and a low price-to-sales 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. 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 2.8%.
3. The payout ratio is less than 55%.
4. The annual rate of dividend growth over the past five years is greater than 14%.
5. Price to sales ratio is less or equal 1.0.
6. Price to free cash flow is less than 19, (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).
7. Trailing P/E is less than 18.
8. Forward P/E is less than 15.
After running this screen on February 21, 2013, before the market open, I discovered the following three stocks:
Cracker Barrel Old Country Store, Inc. (CBRL)
Cracker Barrel Old Country Store, Inc. develops and operates the Cracker Barrel Old Country Store restaurant and retail concept in the United States.
Cracker Barrel has a trailing P/E of 15.15 and a very low forward P/E of 12.29. The PEG ratio is at 1.51, and the price-to-sales ratio is very low at 0.60. The forward annual dividend yield is quite high at 3.03%, and the payout ratio is only 37.9%. The annual rate of dividend growth over the past five years was very high at 22.7%.
The CBRL stock price is 1.09% above its 20-day simple moving average, 2.70% above its 50-day simple moving average and 5.86% above its 200-day simple moving average, which indicates short-term, mid-term and long-term uptrend.
Cracker Barrel will report its latest quarterly financial results on February 26. CBRL is expected to post a profit of $1.25 a share, a 4.2% 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 rich dividend, the strong dividend payments growth rate, and the fact that the stock is in an uptrend are all factors that make CBRL stock quite attractive.
CBRL Dividend data by YCharts
CBRL Dividend Yield data by YCharts
Harris Corporation (HRS)
Harris Corporation, together with its subsidiaries, operates as an international communications and information technology company that serves government and commercial markets worldwide.
Harris has a very low trailing P/E of 9.67 and a very low forward P/E of 9.31. The price to free cash flow for the trailing 12 months is very low at 10.68, and the price-to-sales ratio is at 1.00. The forward annual dividend yield is quite high at 3.12%, and the payout ratio is only 28.5%. The annual rate of dividend growth over the past five years was very high at 22.6%.
On January 29, Harris Corporation announced fiscal 2013 second-quarter results. The company reported revenue in the second quarter of fiscal 2013 of $1.29 billion compared with $1.31 billion in the prior year. GAAP income from continuing operations was $142 million, or $1.25 per diluted share, compared with $136 million, or $1.18 per diluted share. In the report, William M. Brown, president and chief executive officer, said:
Harris second quarter results were solid in a very difficult and uncertain government spending environment. Orders were up 30 percent compared to the prior year with all three business segments experiencing double-digit growth. In this current environment, we will continue to focus on providing our customers with innovative and cost-effective solutions, lowering costs throughout our company, increasing free cash flow and effectively deploying capital.
Also in the report, the company gave this guidance:
Due to expected slower government spending resulting from growing budget uncertainty, Harris has updated its fiscal 2013 guidance for income from continuing operations from a range of $5.10 to $5.30 per share to a range of $5.00 to $5.20 per share. Revenue is now expected to decline 2 to 4 percent compared to the prior year.
The compelling valuation metrics, the rich dividend, the strong dividend payments growth rate, and the solid fiscal 2013 second-quarter results are all factors that make HRS stock quite attractive.
HRS Dividend data by YCharts
HRS Dividend Yield data by YCharts
Owens & Minor Inc. (OMI)
Owens & Minor, Inc., together with its subsidiaries, provides distribution, third-party logistics, and other supply-chain management services to healthcare providers and suppliers of medical and surgical products.
Owens & Minor has a very low debt (total debt to equity is only 0.22), and the trailing P/E is at 17.85 and the forward P/E is quite low at 14.83. The price-to-sales ratio is very low at 0.22, and the price to free cash flow for the trailing 12 months is quite low at 15.71. The forward annual dividend yield is at 2.87%, and the payout ratio is 51.2%. The annual rate of dividend growth over the past five years was at 14.2%.
On February 11, Owens & Minor reported its 4th-quarter and full-year 2012 financial results. In the report, Craig R. Smith, president & chief executive officer, said:
We made solid progress in 2012 on strategic investments that will support the long-term success of our company in a rapidly changing healthcare environment. I was pleased with the overall performance of our Domestic business in a tough operating environment, as our asset management results were very strong, expense control was impressive, and we generated $219 million in operating cash flow. As we look ahead to 2013, we are focused on improving our performance with Movianto by leveraging capacity and achieving expense reductions in our European network. We are very enthusiastic about our future and the growing demand for our healthcare logistics services.
Also in the report, the company gave an outlook for 2013:
The company reiterated the following financial guidance for 2013, which was originally issued at its November 2012 Investor Day:
For 2013, the company is targeting revenue growth of 2% to 4% and adjusted net income per diluted share of $1.90 to $2.00 for the year, which excludes acquisition-related and exit & realignment costs.The company reiterated the following financial guidance for 2013, which was originally issued at its November 2012 Investor Day:
For 2013, the company is targeting revenue growth of 2% to 4% and adjusted net income per diluted share of $1.90 to $2.00 for the year, which excludes acquisition-related and exit & realignment costs.
The cheap valuation metrics, the solid 4th quarter 2012 results, the rich dividend and the fact that the company consistently raises dividend payments are all factors that make OMI stock quite attractive.
OMI Dividend data by YCharts
OMI Dividend Yield data by YCharts
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.