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 debt to equity 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 Russell 3000 index. Russell Investment explanation:
The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.
2. Dividend yield is greater than 3.0%.
3. The payout ratio is less than 40%.
4. The annual rate of dividend growth over the past five years is greater than 15%.
5. Trailing P/E is less than 13.
6. Forward P/E is less than 13.
7. Debt to equity is less than 0.25.
8. Average annual earnings growth estimates for the next five years is greater or equal 3%.
After running this screen on April 06, 2013, I discovered the following three stocks:
Guess' Inc. (NYSE:GES)
Guess?, Inc. designs, markets, distributes, and licenses lifestyle collections of contemporary apparel and accessories for men, women, and children that reflect the American lifestyle and European fashion sensibilities.
Guess? Inc. has almost no debt at all (total debt to equity is only 0.01), and it has a very low trailing P/E of 11.28 and a very low forward P/E of 12.21. The PEG ratio is at 1.26, and the price to sales is very low at 0.83. The average annual earnings growth estimates for the next 5 years is at 9%. The forward annual dividend yield is quite high at 3.15%, and the payout ratio is only 35.6%. The annual rate of dividend growth over the past five years was very high at 20.1%.
On March 20, Guess' Inc. reported its fourth-quarter fiscal 2013 and full fiscal year 2013 financial results, which beat EPS expectations by $0.08 and beat on revenues. Company guides for Q1, EPS and revenues, were below consensus and guides for FY14, EPS and revenues, were also below consensus.
Fourth Quarter Fiscal 2013 Highlights
- Asian revenues increased 19% in U.S. dollars and 14% in constant dollars
- North American Retail revenues increased 2%; retail comp sales declined 6.3%
- European revenues increased 3% in U.S. dollars and local currency
- Operating earnings decreased 12%; operating margin declined 280 basis points to 15%
Fiscal Year 2013 Highlights
- Global revenues down 1% at $2.7 billion in U.S. dollars; increased 2% in constant dollars
- Asian revenues increased 16% in both U.S. dollars and constant dollars
- European revenues decreased 7% in U.S. dollars; flat in local currency
- North American Retail revenues flat at $1.1 billion; retail comp sales declined 6.6%
- Adjusted operating earnings decreased 34%; GAAP operating earnings decreased 31%
- Invested $140 million to repurchase 5 million shares and paid special dividend of $1.20 per share
In the report, Paul Marciano, Chief Executive Officer, commented:
Despite a difficult environment, we were able to deliver fourth quarter financial results that were at the high end of our expectations. We continued to direct our expansion efforts towards newer international markets, growing revenues in the double digits in key markets such as Korea, Germany, Greater China, Mexico and Russia. In North America, lower traffic and the promotional environment continued to impact our business while in Southern Europe, the weak economic conditions continue to impact consumer confidence.
The compelling valuation metrics, the rich dividend and the fact that the company consistently has raised dividend payments are all factors that make GES stock quite attractive..
IAMGOLD Corp. (NYSE:IAG)
IAMGOLD Corporation engages in the exploration, development, and operation of mining properties. Its products include gold, silver, niobium, and copper deposits.
IAMGOLD has a very low debt (total debt to equity is only 0.17) and it has a very low trailing P/E of 7.35 and even a lower forward P/E of 7.03. The average annual earnings growth estimates for the next 5 years is at 3%. The forward annual dividend yield is quite high at 3.82%, and the payout ratio is only 28.1%. The annual rate of dividend growth over the past five years was very high at 15.8%.
The IAG stock is trading 61% below its 52-week high, and has 91% upside potential based on the consensus mean target price of $12.50.
On February 20, IAMGOLD reported its fourth-quarter and full year 2012 financial results, which missed EPS expectations by $0.01 and beat on revenues.
In the report, the company said:
Revenues of $1.7 billion for 2012 were virtually flat with the prior year, as margins rose slightly to $952 an ounce. Net earnings from continuing operations attributable to equity holders were $334.7 million ($0.89 per share) in 2012 compared to $391.3 million ($1.04 per share) in 2011. Excluding items not indicative of underlying operating performance, adjusted net earnings attributable to equity holders were $316.9 million ($0.84 per share) compared to $405.7 million ($1.08 per share) in 2011. The year-over-year earnings decline is the result of lower gold production and higher operating costs and increased exploration expenses, partly offset by higher gold prices. Operating cash flow before changes in working capital was $504.0 million ($1.34 per share) compared to $656.7 million ($1.75 per share) in the previous year.
All these factors -- the very low multiples, the rich dividend, the fact that the company consistently has raised dividend payments and the fact that the stock is trading way below book value (price-to-book value is only 0.66) -- make IAG stock quite attractive.
KLA-Tencor Corporation (NASDAQ:KLAC)
KLA-Tencor Corporation designs, manufactures, and markets process control and yield management solutions for the semiconductor and related nanoelectronics industries.
KLA-Tencor has a very low debt (total debt to equity is only 0.22) and it has a very low trailing P/E of 12.65 and even a lower forward P/E of 11.15. The PEG ratio is at 1.26, and the current ratio is very high at 4.44. The average annual earnings growth estimates for the next 5 years is at 10%. The forward annual dividend yield is quite high at 3.09%, and the payout ratio is only 39.1%. The annual rate of dividend growth over the past five years was very high at 21.8%.
The KLAC stock is trading 10.13% below its 52-week high, and has 15.2% upside potential based on the consensus mean target price of $59.60.
KLA-Tencor will report its latest quarterly financial results on April 22. KLAC is expected to post a profit of $0.86 a share, a 32.3% decline 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 cheap valuation metrics, the good earnings growth prospect, the rich dividend and the fact that the company consistently has raised dividend payments are all factors that make KLAC stock quite attractive.