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Arie Goren, Portfolio123 (471 clicks)
Long only, value, research analyst, dividend investing
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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 very profitable companies that pay solid 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:

  1. The forward dividend yield is greater than 2.0%.
  2. The payout ratio is less than 30%.
  3. The annual rate of dividend growth over the past five years is greater than 7%.
  4. Price to free cash flow for the trailing 12 months is less than 14.
  5. Trailing P/E is less than 14.
  6. Forward P/E is less than 13.
  7. Average annual earnings growth estimates for the next five years is greater or equal 5%.
  8. Debt-to-equity ratio is less than 0.25.

After running this screen on July 09, 2013, before the market open, I discovered the following three stocks:

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AXS Dividend Chart

AXIS Capital Holdings Limited (AXS)

AXIS Capital Holdings Limited provides specialty lines insurance and treaty reinsurance products worldwide.

AXIS Capital has a very low debt (total debt to equity is only 0.18) and it has a very low trailing P/E of 8.25 and a very low forward P/E of 9.81. The price to free cash flow for the trailing 12 months is very low at 5.33, and the average annual earnings growth estimates for the next five years is at 5%. The forward annual dividend yield is at 2.18%, and the payout ratio is only 18%. The annual rate of dividend growth over the past five years was quite high at 7.36%.

The AXS stock price is 1.22% above its 20-day simple moving average, 2.94% above its 50-day simple moving average and 17.24% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

AXS will report its latest quarterly financial results on July 30. AXS is expected to post a profit of $1.18 a share, a 31% 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 solid 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 AXS stock quite attractive.

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Chart: finviz.com

The Chubb Corporation (CB)

The Chubb Corporation, through its subsidiaries, provides property and casualty insurance to businesses and individuals.

The Chubb Corporation has a low debt (total debt to equity is only 0.22) and it has a very low trailing P/E of 13.71 and a very low forward P/E of 12.29. The price to free cash flow for the trailing 12 months is very low at 13.12, and the average annual earnings growth estimates for the next five years is quite high at 9.33%. The forward annual dividend yield is at 2.03%, and the payout ratio is only 28%. The annual rate of dividend growth over the past five years was quite high at 7.17%.

CB will report its latest quarterly financial results on July 25. CB is expected to post a profit of $1.60 a share, a 17% rise from the company's actual earnings for the same quarter a year ago.

The very low multiples, the solid dividend, and the fact that the company consistently has raised dividend payments are all factors that make CB stock quite attractive.

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Chart: finviz.com

PartnerRe Ltd. (PRE)

PartnerRe Ltd., through its subsidiaries, provides reinsurance services worldwide.

PartnerRe has a very low debt (total debt to equity is only 0.12) and it has a very low trailing P/E of 5.91 and a very low forward P/E of 10.62. The PEG ratio is very low at 0.66, and the price-to-book value is also very low at 0.76. The price to free cash flow for the trailing 12 months is very low at 10.14, and the average annual earnings growth estimates for the next five years is quite high at 9.0%. The forward annual dividend yield is quite high at 2.86%, and the payout ratio is only 17%. The annual rate of dividend growth over the past five years was quite high at 7.59%.

PRE will report its latest quarterly financial results on July 29. PRE is expected to post a profit of $1.70 a share, a 23% decline from the company's actual earnings for the same quarter a year ago.

All these factors - the very low multiples, the solid dividend, the fact the company consistently has raised dividend payments, and the fact that PRE stock is selling way below book value -- make PRE stock quite attractive.

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Chart: finviz.com

Source: 3 Good-Yielding Financial Stocks With Low Price To Free Cash Flow And Low Debt