I have searched for very profitable companies that pay very rich dividends. Those stocks would have to show very low price to free cash flow. 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.
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:
- Dividend yield is greater than 5.8%.
- The payout ratio is less than 70%.
- Price to free cash flow is less than 8.
- Trailing P/E is less than 10.
After running this screen on February 28, 2013, before the market open, I discovered the following three stocks:
Intersections Inc. (INTX)
Intersections Inc. provides subscription-based consumer protection services and other consumer products and services primarily in the United States.
Intersections has almost no debt at all (total debt to equity is only 0.02), and it has a very low trailing P/E of 9.04. The PEG ratio is very low at 0.90, and the price-to-sales ratio is also very low at 0.54. The price to free cash flow for the trailing 12 months is very low at 7.53, and the average annual earnings growth estimates for the next five years is at 10.00%. The forward annual dividend yield is very high at 7.50%, and the payout ratio is at 67.8%.
The INTX stock is trading 4.59% above its 20-day simple moving average, 5.03% above its 50-day simple moving average, and 0.84% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend. The stock is trading 29% below its 52-week high, and has 46.8% upside potential based on the consensus mean target price of $15.66.
Intersections Inc. will report its latest quarterly financial results on March 17. The reported results will probably affect the stock price in the short term.
The cheap valuation, the very rich dividend, the 46.8% upside potential based on the consensus mean target price of $15.66, and the fact that the stock is in an uptrend are all factors that make INTX stock quite attractive.
IDT Corporation (IDT)
IDT Corporation operates as a telecommunications company. The company operates in two segments, Telecom Platform Services and Consumer Phone Services.
IDT Corporation has a very low debt (the total debt to equity is only 0.33), and the trailing P/E is very low at 5.16 and the forward P/E is also very low at 6.81. The price to free cash flow for the trailing 12 months is very low at 4.28, and the price-to-sales ratio is only 0.15. The forward annual dividend yield is very high at 5.88%, and the payout ratio is only 30.3%.
The stock is trading 7.35% below its 52-week high and has 47% upside potential based on the consensus mean target price of $15.00.
On December 10, 2012, IDT Corporation reported its financial and operational results for the first quarter fiscal 2013, which beat expectations on EPS and on revenues. In the report, Howard Jonas, IDT's Chairman and CEO, said:
We again delivered positive results this quarter. IDT Telecom generated healthy revenue, gross profit and bottom line increases, while Fabrix and Zedge are also making excellent progress. Looking ahead, we are confident that the investments we are making in technology, new product development and other initiatives will continue to drive growth.
Also in the report, the company said:
IDT's Board of Directors declared a special cash dividend of $0.60 per share, which was paid on November 13, 2012, and suspended payment of the Company's regular $0.15 per share quarterly dividend for fiscal 2013. Future dividends will be at a level commensurate with the Company's financial results, strategic goals and available resources.
IDT will report its latest quarterly financial results on March 07. IDT is expected to post a profit of $0.30 a share, a 3.4% 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 very rich dividend, the 47% upside potential based on the consensus mean target price of $15.00, and the good first-quarter financial results are all factors that make IDT stock quite attractive.
Student Transportation Inc. (STB)
Student Transportation Inc. provides school bus transportation and management services to public and private schools in North America.
Student Transportation has a very low trailing P/E of 6.03. The price to free cash flow for the trailing 12 months is very low at 4.08, and the price-to-sales ratio is also very low at 0.91. The forward annual dividend yield is very high at 8.73%, and the payout ratio is at 52.4%.
On February 11, Student Transportation reported financial results for the second quarter of fiscal year 2013, ended December 31, 2012. The company said that revenue for the second quarter of fiscal 2013 increased 18 percent from the same period last year to $119.4 million from $101.1 million, while adjusted EBITDA increased 20 percent to $28.4 million compared to $23.7 million for the second quarter last year. STB reported a net income of $3.0 million or $0.04 per common share for the second quarter of fiscal 2013 compared to the prior fiscal year second quarter of $1.3 million or $0.02 per common share. In the report, Denis J. Gallagher, chairman and CEO, said:
We are pleased with the second quarter results which were an improvement over the prior year same quarter and in line with our internal expectations despite the storm. The improvement reflects the continued momentum of the growth secured in the prior fiscal year as well as a disciplined focus on controls we put in place to reduce our fuel costs despite higher market prices year over year. As previously stated, we have secured an approximate 15 percent increase in annualized revenue for fiscal 2013.
The cheap valuation metrics, the very rich dividend, and the solid second quarter fiscal 2013 results, are all factors that make STB stock quite attractive.