Seeking Alpha
Arie Goren, Portfolio123 (473 clicks)
Long only, value, research analyst, dividend investing
Profile| Send Message| ()  

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 with low payout ratio, and that have a very low price to free cash flow. Those stocks would have to show also a very low trailing and forward P/E and a low debt.

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. Price is greater than 2.00.
  2. Market cap is greater than $100 million.
  3. The forward dividend yield is greater than 2.10%.
  4. The payout ratio is less than 25%.
  5. Price to free cash flow for the trailing 12 months is less than 13.
  6. Trailing P/E is less than 13.
  7. Forward P/E is less than 12
  8. Total debt to equity is less than 0.30..

After running this screen on September 03, 2013, before the market open, I discovered the following three stocks:

(click to enlarge)

(click to enlarge)

(click to enlarge)

Nature's Sunshine Products Inc. (NATR)

Nature's Sunshine Products, Inc., a natural health and wellness company, together with its subsidiaries, primarily engages in the manufacture and direct sale of nutritional and personal care products worldwide.

Nature's Sunshine Products has almost no debt at all (total debt to equity is only 0.04), and it has a very low trailing P/E of 12.84 and a very low forward P/E of 11.68. The price-to-sales ratio is very low at 0.75, and the price to free cash flow for the trailing 12 months is also very low at 12.97. The forward annual dividend yield is at 2.29%, and the payout ratio is only 22%.

The NATR stock price is 3.09% above its 20-day simple moving average, 11.36% above its 50-day simple moving average and 31.34% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

Nature's Sunshine Products has recorded strong EPS growth and mild revenue growth, during the last three years and the last five years, as shown in the table below.

Source: Portfolio123

On August 08, Nature's Sunshine Products reported its second-quarter financial results, which beat EPS expectations by $0.01.

Second-Quarter Highlights

  • Net sales were $93.7 million, compared with $93.0 million in the same quarter a year ago, an increase of 0.7 percent, and net sales increased 1.4 percent in local currencies.
  • As of June 30, 2013 and 2012, total active Managers worldwide were 17,100 on each date, while total active Distributors and customers worldwide were 331,000 and 337,600, respectively.
  • Operating income was $7.8 million, compared with $10.3 million in the same quarter a year ago, a decrease of 24.2 percent. The $2.5 million decrease in operating income was primarily due to a $2.2 million increase in selling, general and administrative expenses attributable to investment in growth initiatives.
  • Adjusted EBITDA, defined here as net income before taxes, depreciation and amortization, and other income, and adjusted to exclude share-based compensation expense was $9.7 million, compared with $11.9 million in the same quarter a year ago, a decrease of 18.8 percent.
  • Net income was $6.1 million, compared with $7.3 million in the same quarter a year ago, a decrease of 16.9 percent.
  • Basic and diluted net income per share was $0.38, compared to $0.47 and $0.46, respectively, for the same quarter a year ago.
  • Cash and cash equivalents of $87.3 million were a record high, up from $79.2 million at December 31, 2012.
  • As of June 30, 2013, shareholders' equity was $122.8 million, compared to $115.6 million as of December 31, 2012, an increase of 6.2 percent. Including dividends paid in the first six months of the year, the increase in shareholder equity was 7.4 percent.

In the report, the company declared a special one-time cash dividend of $1.50 per share, a regular quarterly cash dividend of $0.10 per share and a $10 million share repurchase program.

Nature's Sunshine Products has recorded very strong EPS growth, and considering its compelling valuation metrics, and the fact that the stock is in an uptrend, NATR stock can move higher. Furthermore, the solid regular dividend and the special dividend represent a nice income.

Since the company is rich in cash ($5.62 a share) and has almost no debt and its payout ratio is very low, there is hardly a risk that the company will reduce its dividend payment.

Risks to the expected capital gain and to the dividend payment include a downturn in the U.S. economy and a change in the public passion for health products.

(click to enlarge)

Chart: finviz.com

Marathon Petroleum Corporation (MPC)

Marathon Petroleum Corporation, together with its subsidiaries, engages in refining, transporting, and marketing petroleum products primarily in the United States.

Marathon Petroleum has a very low debt (total debt to equity is only 0.29), and it has a very low trailing P/E of 7.37 and a very low forward P/E of 7.78. The price-to-cash ratio is at 7.61, and the price-to-sales ratio is very low at 0.26. The PEG ratio is very low at 0.67, and the average annual earnings growth estimates for the next five years is quite high at 11%. The price to free cash flow for the trailing 12 months is very low at 5.99. The forward annual dividend yield is at 2.32%, and the payout ratio is only 14%.

The MPC stock price is 0.21% above its 20-day simple moving average and 1.55% above its 50-day simple moving average. That indicates a short-term and mid-term uptrend.

Marathon Petroleum has recorded strong revenue and EPS growth during the last year and the last three years, as shown in the table below.

Source: Portfolio123

On August 01, Marathon Petroleum reported its second-quarter financial results, which missed EPS expectations by $0.03 (in line with pre-announcement range), and beat on revenues.

Second-Quarter Highlights

  • Reported adjusted earnings of $632 million
  • Delivered strong Speedway segment performance
  • Increased dividend 20 percent to $0.42 per share
  • Returned nearly $1 billion to shareholders

In the report, the company noted MPC`s continuing shareholder focus in the second quarter:

We paid $113 million in dividends and purchased $882 million of common stock during the second quarter as part of our commitment to return capital to shareholders. The recent announcement that we have increased our dividend by 20 percent reflects our confidence in the business and further underscores our commitment to total shareholder return over the long term. MPC`s remaining share repurchase authorization was approximately $1.3 billion as of June 30.

Marathon Petroleum has recorded strong revenue and EPS growth, and considering its compelling valuation metrics and its good earnings growth prospects, MPC stock can move higher. Furthermore, the solid dividend represents a nice income.

Since the company is rich in cash ($9.53 a share) and has a low debt and its payout ratio is very low, there is hardly a risk that the company will reduce its dividend payment.

Risks to the expected capital gain and to the dividend payment include a downturn in the U.S. economy and narrower crude oil price differentials.

(click to enlarge)

Chart: finviz.com

HCC Insurance Holdings Inc. (HCC)

HCC Insurance Holdings, Inc. underwrites non-correlated specialty insurance products worldwide.

HCC Insurance has a very low debt (total debt to equity is only 0.18), and it has a very low trailing P/E of 10.45 and a very low forward P/E of 11.54. The price to free cash flow for the trailing 12 months is very low at 9.21, and the average annual earnings growth estimates for the next five years is at 8.50%. The forward annual dividend yield is at 2.13%, and the payout ratio is only 16%. The annual rate of dividend growth over the past three years was at 7.17% and over the past five years was at 8.79%.

HCC Insurance has recorded solid revenue, EPS and dividend growth during the last year, the last three years and the last five years, as shown in the table below.

Source: Portfolio123

On July 30, HCC Insurance Holdings reported its second-quarter financial results, which beat EPS expectations by $0.03.

Second Quarter 2013 Highlights:

  • Net earnings of $88.2 million, or $0.87 per diluted share
  • GAAP combined ratio of 85.3%
  • Catastrophe losses of $21.4 million
  • Annualized return on equity of 9.9%
  • Annualized operating return on equity of 10.3%
  • Net investment income increased 4% to $55.7 million

HCC Insurance has recorded solid revenue, EPS and dividend growth, and considering its cheap valuation metrics and its good earnings growth prospects, HCC stock still has room to go up. Furthermore, the solid dividend represents a nice income.

Since the company is very profitable, has a low debt and its payout ratio is very low, there is hardly a risk that the company will reduce its dividend payment.

Risks to the expected capital gain and to the dividend payment include a downturn in the U.S. economy and large catastrophe losses.

(click to enlarge)

Chart: finviz.com

Source: 3 Good-Yielding Stocks With Low Price To Free Cash Flow And Low Payout Ratio