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Arie Goren, Portfolio123 (472 clicks)
Long only, value, research analyst, dividend investing
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I have searched for highly profitable companies that pay rich dividends and have raised their payouts at a high rate for the last five years. Companies that regularly increase dividends are generally more stable. Increasing dividends is the assurance that dividend income retains its purchasing power over time. Those stocks would also have to show a very low debt and strong 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 2.10%.
  2. The payout ratio is less than 35%.
  3. The annual rate of dividend growth over the past five years is greater than 6%.
  4. Last dividend declared is greater than the last dividend paid.
  5. Total debt to equity is less than 0.10.
  6. Trailing P/E is less than 15.
  7. Forward P/E is less than 13.
  8. Average annual earnings growth estimates for the next five years is greater than 9%.

After running this screen on September 06, 2013, before the market open, I discovered the following three stocks:


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Coach, Inc. (COH)

Coach, Inc. designs and markets bags, accessories, business cases, footwear, wearables, jewelry, sunwear, travel bags, watches, and fragrances for women and men in the United States and internationally.


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Coach, Inc. has no debt at all, and it has a low trailing P/E of 14.79 and a very low forward P/E of 12.59. The PEG ratio is at 1.51, and the average annual earnings growth estimates for the next five years is quite high at 9.79%. The forward annual dividend yield is at 2.53%, and the payout ratio is only 34%. The annual rate of dividend growth over the past three years was very high at 48.88% and over the past five years was also very high at 101.54%.

Coach, Inc. has recorded strong 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, Coach, Inc. reported its fourth-quarter fiscal 2013 financial results, which was in-line with EPS expectations. The company reported net sales of $1.22 billion for its fourth fiscal quarter ended June 29, 2013, compared with $1.16 billion reported in the same period of the prior year, an increase of 6%. On a constant currency basis sales rose 9% for the quarter. Net income for the quarter totaled $254 million, with earnings per diluted share of $0.89, excluding unusual items. This compared to net income of $251 million and earnings per diluted share of $0.86, in the prior year's fourth quarter. Reported net income totaled $221 million with earnings per diluted share of $0.78.

Coach, Inc. has recorded strong revenue, EPS and dividend growth during the last three years and the last five years; the annual rate of revenue growth over the past five years was at 9.80%, the EPS growth was at 10.72, and the dividend growth was at 101.54%

Since COH has cheap valuation metrics, and its growth prospects are good, a capital gain can be expected, along the solid dividend.

Coach, Inc. is rich in cash ($4.03 a share) and has no debt and its payout ratio is very low. Therefore, there is hardly a risk that the company will reduce its dividend payment.

Since a significant portion of Coach, Inc. business is in Japan, where the functional currency is the yen, the impact from translating yen into dollars might reduce its operating earnings, in case of decrease in the exchange rate of the yen.


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Chart: finviz.com

Eastern Insurance Holdings, Inc. (EIHI)

Eastern Insurance Holdings, Inc., through its subsidiaries, provides workers' compensation insurance and reinsurance products in the United States.


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Source: company presentation

Eastern Insurance Holdings has no debt at all, and it has a very low trailing P/E of 12.69 and a very low forward P/E of 11.75. The PEG ratio is quite low at 1.06, and the average annual earnings growth estimates for the next five years is quite high at 12%. The price-to-sales ratio is very low at 0.84, and the price to free cash flow for the trailing 12 months is very low at 7.70. The forward annual dividend yield is at 2.18%, and the payout ratio is only 21%. The annual rate of dividend growth over the past five years was at 6.96%.

Eastern Insurance Holdings 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, Eastern Insurance Holdings reported its second-quarter results, which beat EPS expectations by $0.08. The company reported net income for the three months ended June 30, 2013 of $3.0 million, or $0.39 per diluted share, compared to net income of $1.3 million, or $0.17 per diluted share, for the same period in 2012. Revenue for the second quarter of 2013 increased to $47.1 million compared to $38.8 million for the same period in 2012. Net premiums earned were $45.5 million for the second quarter of 2013 compared to $38.7 million for the same period in 2012.

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

Since Eastern Insurance Holdings is rich in cash ($6.22 a share) and has no debt and its payout ratio is very low, there is hardly a risk that the company will reduce its dividend payment.


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Chart: finviz.com

Foot Locker, Inc. (FL)

Foot Locker, Inc., together with its subsidiaries, operates as a retailer of athletic footwear and apparel.


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Source: company presentation

Foot Locker has a very low debt (total debt to equity is only 0.06), and it has a very low trailing P/E of 12.12 and a very low forward P/E of 10.65. The PEG ratio is at 1.29, and the average annual earnings growth estimates for the next five years is quite high at 9.40%. The forward annual dividend yield is at 2.44%, and the payout ratio is only 28%. The annual rate of dividend growth over the past three years was quite high at 6.27% and over the past five years was also high at 7.57%.

Analysts recommend the stock. Among the sixteen analysts covering the stock, six rate it as a strong buy, seven rate it as a buy, and only three rate it as a hold.

Foot Locker has recorded strong 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


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Source: company presentation

On August 23, Foot Locker reported its second-quarter results, which missed EPS expectations by $0.01, was in-line on revenues, and reaffirmed FY14 guidance. Net income for the Company's second quarter ended August 3, 2013 was $66 million, or $0.44 per share, compared with net income of $59 million, or $0.39 per share, last year, an increase in earnings per share of 13 percent.

Second quarter comparable-store sales increased 1.8 percent. Total second quarter sales increased 6.4 percent, to $1,454 million this year, compared with sales of $1,367 million for the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, total sales for the second quarter increased 5.9 percent.

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

Since Foot Locker is rich in cash ($5.52 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 solid dividend payment include; a downturn in the U.S. economy, decline in the acceptance of its products, and the negative effect of foreign currency fluctuations.


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Chart: finviz.com

Source: 3 Good-Yielding Stocks That Have Raised Payouts By At Least 6% A Year For The Last 5 Years