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 searched for profitable companies that pay rich dividends and that have a very low price to free cash flow. Those stocks would have to show a very low debt and robust earnings growth prospects. 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:
- The forward dividend yield is greater than 3.0%.
- The payout ratio is less than 75%.
- The price to free cash flow is less than 14.
- Trailing P/E is less than 16.
- Forward P/E is less than 17.
- Debt-to-equity ratio is less than 0.30.
- Average annual earnings growth estimates for the next five years is greater than 4%.
After running this screen on May 14, 2013, before the market open, I discovered the following four stocks:
Baldwin & Lyons Inc (NASDAQ:BWINB)
Baldwin & Lyons, Inc., through its subsidiaries, engages in marketing and underwriting property and casualty insurance products primarily in the United States.
Baldwin & Lyons has almost no debt at all (total debt to equity is only 0.03) and it has a very low trailing P/E of 10.14 and a forward P/E of 16.01. The price to free cash flow for the trailing 12 months is very low at 8.63, and the average annual earnings growth estimates for the next five years is quite high at 8.0%. The price to book value is very low at 1.00, and the PEG ratio is at 1.27. The forward annual dividend yield is very high at 4.16%, and the payout ratio is only 42%.
On May 02, Baldwin & Lyons reported its first-quarter 2013 financial results. The company announced after tax operating income, defined as net income before investment gains and losses, of $5.6 million, or $0.38 per share, for the first quarter of 2013. This compares to after tax operating income of $8.0 million, or $0.54 per share, during the first quarter of 2012, which was a record quarter for the Company. Book value per share increased $0.79 per share during the first quarter, after the payment of $0.25 per share in regular cash dividends, with the combination of the increase in book value and dividends representing a 4.5% total return for the quarter on beginning book value.
The compelling valuation metrics, the very rich dividend, and the fact that the stock is trading at book value are all factors that make BWINB stock quite attractive.
CNOOC Ltd. (NYSE:CEO)
CNOOC Limited, an investment holding company, engages in the exploration, development, production, and sale of crude oil, natural gas, and other petroleum products. The company is based in Hong Kong, Hong Kong, and is considered a Red Chip company due to its listing on the Hong Kong Stock Exchange. CNOOC Limited is a subsidiary of China National Offshore Oil Corporation.
CNOOC has a very low debt (total debt to equity is only 0.19) and it has a very low trailing P/E of 8.01 and even a lower forward P/E of 7.13. The price to free cash flow for the trailing 12 months is extremely low at 5.49, and the average annual earnings growth estimates for the next five years is at 4.40%. The forward annual dividend yield is quite high at 4.0%, and the payout ratio is only 32%. The annual rate of dividend growth over the past five years was at 3.0%. Analysts recommend the stock; among the three analysts covering the stock, two rate it as a strong buy and one rates it as a buy.
On March 22, CNOOC Ltd. announced its annual results for the 12 months ended December 31, 2012. In the report, the company said:
In 2012, the Company made outstanding achievements in exploration activities with breakthroughs in shallow water and deepwater offshore China as well as overseas. Among a total of 21 new discoveries and 19 successful appraisals of oil and gas structures, Penglai 9-1, Dongfang13-2 and Qinhuangdao 29-2/29-2 East all have the potential to be developed into large sized oil and gas fields. The Company's reserve replacement ratio amounted to 188% during the year.
Also in the report, Mr. Li Fanrong, CEO of the company commented:
In 2012, we made significant progresses in all aspects of our business under the guidance of our 'A New Leap Forward' blueprint and maintained a good performance. In 2013, the Company will remain committed to enhancing the capability for sustainable development while ensuring health, safety and environmental-friendly operations and endeavor to build a responsible international energy company.
The very low multiples, the rich dividend, and the strong analyst recommendation are all factors that make CEO stock quite attractive.
Cisco Systems, Inc. (NASDAQ:CSCO)
Cisco Systems, Inc. designs, manufactures, and sells Internet protocol based networking and other products related to the communications and information technology industries worldwide.
Cisco Systems has a very low debt (total debt to equity is only 0.29) and it has a very low trailing P/E of 12.22 and a very low forward P/E of 10.13. The PEG ratio is at 1.48, and the current ratio is very high at 3.30. The price to free cash flow for the trailing 12 months is very low at 13.50, and the average annual earnings growth estimates for the next five years is quite high at 8.27%. The forward annual dividend yield is at 3.20%, and the payout ratio is only 39%.
The CSCO stock price is 2.57% above its 20-day simple moving average, 1.42% above its 50-day simple moving average and 9.94% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.
CSCO will report its latest quarterly financial results on May 15. CSCO is expected to post a profit of $0.49 a share, a 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.
All these factors -- the very low multiples, the rich dividend and the fact that the stock is in an uptrend -- make CSCO stock quite attractive.
Ennis Inc. (NYSE:EBF)
Ennis, Inc., together with its subsidiaries, engages in the print and manufacture of business forms and other business products.
Ennis has a very low debt (total debt to equity is only 0.16) and it has a trailing P/E of 15.99 and a very low forward P/E of 9.10. The PEG ratio is very low at 0.94, and the price-to-sales ratio is also very low at 0.74. The price to free cash flow for the trailing 12 months is very low at 11.51, and the average annual earnings growth estimates for the next five years is very high at 17% . The forward annual dividend yield is very high at 4.61%, and the payout ratio is at 74%. The annual rate of dividend growth over the past five years was very high at 17.9%.
The EBF stock price is 2.09% above its 20-day simple moving average, 0.95% above its 50-day simple moving average and 1.20% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.
On April 22, Ennis reported financial results for the quarter and fiscal year ended February 28, 2013.
Highlights for the quarter include:
- Consolidated sales increased 1.7%
- Print sales increased $7.4 million
- Apparel sales declined $5.2 million
- Consolidated gross profit margin increased 360 basis points
- Print gross profit margin increased 130 basis points
- Apparel gross profit margin increased 540 basis points
- Diluted EPS increased 108% to $0.27 per share
In the report, Keith Walters, Chairman, Chief Executive Officer and President, commented by stating:
Overall we are pleased with our results for the quarter. As we have stated previously, our apparel results for the fiscal year were impacted by the high cost of cotton in finished goods inventory. We attempted to match the sales price with the cost through the sale of this high cost inventory, rather than reducing our selling price below our embedded costs. Thus, we absorbed the negative financial impact over our inventory turn cycle rather than recognizing the large impact of an inventory write-down in a single quarter, as some of our competitors did. We continue to believe this was the right approach with the overall financial impact being lower than if we had taken a significant loss in one or two quarters. However, most of the higher cost cotton has made its way through our Apparel's finished goods inventory and the divergence between the current purchase cost of cotton and the average cost in finished goods inventory continues to shrink. As a result, we expect our Apparel margin will continue to improve, as it did this past quarter. Our Print margin continued to remain healthy and improved this quarter as we started to eliminate some of the duplicate selling, general and administrative costs associated with our recent acquisitions.
The compelling valuation metrics, the very rich dividend, the fact that the company consistently has raised dividend payments, and the fact that the stock is in an uptrend are all factors that make EBF stock quite attractive.