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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 profitable companies that pay rich dividends with a low payout ratio and that have a very low price to free cash flow. Those stocks would have to also show a low debt.

I used the Portfolio123's powerful screener to perform the search. The screen's formula requires all stocks to comply with all following demands:

  1. The stock does not trade over-the-counter (OTC).
  2. Price is greater than 1.00.
  3. Market cap is greater than $100 million.
  4. Dividend yield is greater than 3.0%.
  5. The payout ratio is less than 100%.
  6. Total debt to equity is less than 1.0.
  7. Price to free cash flow is less than 10.

As shown in the chart below, 18 stocks came out, as a result, (the number of stocks left after each demand can be seen in the chart). In this article, I describe three of these stocks which in my opinion can reward an investor a capital gain along a very rich dividend. I recommend readers use this list of stocks as a basis for further research. All the data for this article were taken from Portfolio123, Yahoo Finance and finviz.com, on September 21, 2013.

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MicroFinancial Inc. (NASDAQ:MFI)

MicroFinancial Incorporated, a specialized commercial/consumer finance company, through its wholly-owned subsidiaries, provides microticket equipment leasing and other financing services in the United States.

MicroFinancial has a very low trailing P/E of 12.19 and a very low forward P/E of 9.87. The price to book value is at 1.33, and the price to free cash flow for the trailing 12 months is extremely low at 1.25. The forward annual dividend yield is quite high at 3.08%, and the payout ratio is only 37%. The annual rate of dividend growth over the past three years was very high at 16.96%, and over the past five years was at 3.71%.

MicroFinancial 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 charts below.

Source: Portfolio123

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Source: company presentation

On July 17, MicroFinancial reported its second-quarter financial results, which was in-line with expectations.

Second Quarter 2013 Highlights

  • Net income was $2.5 million or $0.17 per diluted share which compares to $2.6 million or $0.18 per diluted share in the same period last year;
  • Cash received from customers was $32.8 million or $2.22 per diluted share which represents an increase of 9.0% as compared to the same period last year;
  • Revenue increased by 6.7% to $15.7 million as compared to the same period last year;
  • Net charge-offs declined 10.5% to $3.9 million as compared to the same period last year;
  • The Company was able to repurchase 82,169 shares under the buyback program; and
  • The Company paid a cash dividend of $0.06 per share.

MicroFinancial has recorded strong revenue, EPS and dividend growth, and considering its compelling valuation metrics, MFI stock can move higher. Furthermore, the rich dividend represents a nice income.

Risks to the expected capital gain and to the dividend payment include; a downturn in the U.S. economy, and an increase in the net charge-offs from this year $8.1 million level.

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Chart: finviz.com

Seagate Technology Plc (NASDAQ:STX)

Seagate Technology designs, manufactures, markets, and sells hard disk drives for enterprise storage, client compute, and client non-compute market applications worldwide.

Seagate Technology has a very low trailing P/E of 8.61 and a very low forward P/E of 7.04.The price-to-sales ratio is at 1.05, and the price to free cash flow for the trailing 12 months is very low at 8.79. The forward annual dividend yield is quite high at 3.67%, and the payout ratio is only 28%. The annual rate of dividend growth over the past five years was very high at 27.23%.

The STX stock price is 3.70% above its 20-day simple moving average, 0.17% above its 50-day simple moving average and 10.83% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

Seagate Technology has recorded strong EPS and dividend growth and moderate revenue growth, during the last five years, as shown in the table below.

Source: Portfolio123

On July 24, Seagate Technology reported its fiscal fourth quarter and year-end 2013 financial results, which beat EPS expectations by $0.01. During the fourth quarter, the company reported revenue of approximately $3.4 billion, gross margin of 27.4%, net income of $348 million and diluted earnings per share of $0.94. On a non-GAAP basis, Seagate reported gross margin of 28.0%, net income of $447 million and diluted earnings per share of $1.20. During the fourth quarter, the Company generated approximately $394 million in operating cash flow, paid cash dividends of $137 million and repurchased 1 million of ordinary shares for approximately $42 million. The Company issued long-term debt of approximately $1 billion, and repurchased approximately $700 million total par value of its 2016 Notes and 2018 Notes.

Seagate Technology has compelling valuation metrics, and considering that the stock is in an uptrend, STX stock can move higher. Furthermore, the rich dividend represents a nice income.

Risks to the expected capital gain include a downturn in the U.S. economy, and weakness in the electronics market.

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Chart: finviz.com

Access National Corp. (NASDAQ:ANCX)

Access National Corporation operates as a bank holding company for Access National Bank that provides credit, deposit, mortgage, and wealth management services to middle market commercial businesses and associated professionals primarily in the greater Washington, D.C. Metropolitan Area.

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Source: company presentation

Access National Corp. has a very low trailing P/E of 8.21 and a low forward P/E of 13.34. The price-to-cash ratio is very low at 2.81, and the price to free cash flow for the trailing 12 months is extremely low at 2.47. The PEG ratio is low at 1.03, and the average annual earnings growth estimates for the next five years is at 8%. The forward annual dividend yield is quite high at 3.17%, and the payout ratio is at 60%. The annual rate of dividend growth over the past three years was very high 84.20%, and over the past five years was also very high at 44.27%.

Access National Corp. has recorded strong EPS and dividend growth and moderate revenue growth during the last five years, as shown in the charts below.

Source: Portfolio123

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Source: company presentation

On July 23, Access National Corp. reported its second-quarter financial results, which beat EPS expectations by $0.07. The company reported second quarter net income of $3.5 million, down from the record setting $3.9 million recorded in the second quarter of 2012. This represents the corporation's 52nd consecutive quarterly profit over its 54 quarter history. Net income per diluted common share was $0.34 in comparison to the $0.38 reported in the second quarter of 2012. The Board of Directors declared a cash dividend of $0.11 per share for holders of record as of August 7, 2013 and payable on August 23, 2013. This dividend represents a steady migration towards the stated objective equal to a 40% payout ratio of core earnings. It also represents a 1 cent increase over the prior quarter and a 10 cent increase over the last 9 quarters.

Access National Corp. has recorded strong EPS and dividend growth, and it has good earnings growth prospects, and considering its cheap valuation metrics, ANCX stock can move higher. Furthermore, the rich dividend represents a nice income.

Risks to the expected capital gain include a downturn in the U.S. economy, and a decline in its net interest margin of 3.81%.

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Chart: finviz.com

Disclosure: I am long STX. 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.

Source: 3 Good-Yielding Stocks With A Very Low Price To Free Cash Flow