I have searched for very profitable companies that pay rich dividends. Those stocks would have to show very low debt and a 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. All the data for this article were taken from Yahoo Finance and finviz.com.
The screen's formula requires all stocks to comply with all following demands:
- Dividend yield is greater than 4.0%.
- The payout ratio is less than 55%.
- Price to free cash flow is less than 13.
- Trailing P/E is less than 13.
- Forward P/E is less than 10.
- Debt to equity is less or equal 0.30.
After running this screen on April 09, 2013, before the market open, I discovered the following three stocks:
CA Technologies (NASDAQ:CA)
CA Technologies, together with its subsidiaries, provides enterprise information technology management software and solutions in the United States and internationally.
CA Technologies has a very low debt (total debt to equity is only 0.24) and it has a very low trailing P/E of 12.35 and even a lower forward P/E of 9.57. The price to free cash flow for the trailing 12 months is very low at 12.03, and the average annual earnings growth estimates for the next five years is at 8.00%. The forward annual dividend yield is quite high at 4.12%, and the payout ratio is at 51%. The annual rate of dividend growth over the past five years was very high at 44.9%.
CA Technologies will report its latest quarterly financial results on May 06. CA is expected to post a profit of $0.56 a share, the same as 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 and the very high rate of dividend growth are all factors that make CA stock quite attractive.
IDT Corporation (NYSE: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 0.30), and the trailing P/E is very low at 6.47 and the forward P/E is also very low at 8.85. The price to free cash flow for the trailing 12 months is very low at 8.66, and the price-to-sales ratio is only 0.19. The forward annual dividend yield is quite high at 4.52%, and the payout ratio is only 30%.
The IDT stock is trading 15.25% above its 20-day simple moving average, 22.79% above its 50-day simple moving average, and 31.33% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.
On March 07, IDT Corporation reported its second-quarter fiscal 2013 financial results, which beat EPS expectations by $0.13 and beat on revenues.
(All comparisons are for 2Q13 to 2Q12)
• Revenue increased 12.7% to $411.7 million, the 12th consecutive quarter of year over year revenue growth
• Minutes of use increased 19.1% to 8.8 billion
• Gross profit increased 13.7% to $67.2 million
• Gross margin increased 10 basis points to 16.3%
• SG&A expense increased 9.4% to $56.4 million
• Adjusted EBITDA increased 39.8% to $9.0 million
• Income from operations increased 30.3% to $5.3 million
• Net income attributable to IDT increased to $3.0 million compared to $2.7 million
• Non-GAAP net income increased to $9.0 million compared to $6.2 million
• Diluted non-GAAP EPS increased to $0.41 compared to $0.29
• Net cash provided by operating activities decreased to $12.5 million compared to $19.9 million
In the report, Howard Jonas, IDT's Chairman and CEO, said:
IDT continued the positive financial trends of recent quarters powered by consistent revenue growth and steadily improving profitability at IDT Telecom. Looking ahead, we will begin rolling out select payment services over the Boss Revolution platform in the next few months. Overall, we are making good progress on this and other strategic growth initiatives which will transform Boss Revolution into the 'go-to' international calling, payment and remittance platform for immigrant communities.
All these factors -- the very low multiples, the rich dividend, the good second-quarter fiscal 2013 financial results and the fact that the IDT stock is in an uptrend -- make IDT stock quite attractive.
IDT Free Cash Flow Yield data by YCharts
Silicon Motion Technology Corp. (NASDAQ:SIMO)
Silicon Motion Technology Corporation, a fabless semiconductor company, designs, develops, and supplies a portfolio of multimedia data processing, storage, and transfer solutions primarily for consumer electronics applications. The company headquarters is in Zhubei City, Taiwan.
Silicon Motion Technology has no debt at all, and it has a very low trailing P/E of 7.84 and even a lower forward P/E of 5.23. The PEG ratio is very low at 0.36, and the current ratio is very high at 4.63. The price to free cash flow for the trailing 12 months is extremely low at 4.09, and the average annual earnings growth estimates for the next five years is very high at 20%. The forward annual dividend yield is very high at 5.46%, and the payout ratio is only 39 %.
The SIMO stock is trading 50% below its 52-week high, and has 106% upside potential based on the consensus mean target price of $22.57.
Silicon Motion Technology will report its latest quarterly financial results on April 24. SIMO is expected to post a profit of $0.22 a share, a 46.3% 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 very cheap valuation metrics, the strong earnings growth prospect, the rich dividend and the 106% upside potential based on the consensus mean target price of $22.57, are all factors that make SIMO stock quite attractive.
SIMO Revenue Per Share Quarterly data by YCharts
(click to enlarge)
Disclosure: I am long CA, IDT, SIMO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.