2 Large Cap Dividend Stocks With Zero Debt

 |  Includes: GRMN, PAYX
by: Dan Strack


Solid balance sheets may get ignored during bull markets, but are extremely important during any kind of bear market.

Both companies have zero debt with dividend yield over 3%.

Financial flexibility results from strong balance sheets.

If the market crash in 2008 taught us anything, it's that heavily leveraged companies often walk a thin line between success and complete disaster. Debt can make a good company look foolish when things don't go well. As the market retreats from all-time highs, I started looking for large cap companies that pay solid dividends and have no long-term debt. Both Garmin (NASDAQ:GRMN) and Paychex (NASDAQ:PAYX) have a dividend yield over 3%, zero debt and impressive free cash flow.

Momentum stocks have been hit the hardest over the last few days and increasingly investors are looking for value stocks with good fundamentals. When companies don't have to worry about paying down long-term debt or interest, they can utilize their cash flow in a far more effective manner than a debt burdened company.

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Garmin designs, develops and manufactures global positioning systems across five business segments: automotive, outdoor, aviation, fitness and marine. The company is currently in a transition phase as its automotive sales decline, but its other 4 business segments gain market share and revenue. For 2014, revenue and operating income guidance is projected to be flat to slightly negative but the company remains highly profitable with free cash flow of $574 million in 2013 and $550-$600 million projected in 2014.

Garmin could be a great business case study on how a solid balance sheet can help a company through difficult times. Despite consecutive years of declining revenue and a projected 3rd, the company remains highly profitable and continues to increase its cash balance and improve business segments through R&D because it's not bogged down with debt and interest payments. In fact, the company is expected to increase its dividend from $0.45 to $0.48, a 6% increase, at its June annual meeting. The company has also repurchased $31 million in stock and still has $241 million authorized through December of 2014.

Along with an amazing balance sheet that has no debt and over $2.8 billion in cash and marketable securities, 4 of the 5 business segments are experiencing strong growth. The company is expanding beyond its automotive sector. The outdoor sector expects strong growth in its action cameras and golf and pet technologies. The fitness segment saw growth in running and cycling with its recently launched vivofit and vivoki. The aviation segment has tremendous potential as the company looks to identify business and military opportunities. The marine market expects 10-15% growth in 2014 as the company expands into the fishing market with enhanced sonar and expands into the sailing market. For 2014, the company expects double-digit growth across all of its business segments besides automotive.


Paychex provides integrated payroll services, human resources, insurance and benefits outsourcing to small to medium sized businesses. Like Garmin, the company has an outstanding balance sheet with zero debt, nearly a billion dollars in cash and marketable securities and strong free cash flow. The company has an excellent track record of increasing revenue year over year through its payroll and human resource segments.

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Source: Paychex earnings presentation

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Paychex expects to end Fiscal Year 2014 with total revenue up 5-6%, net income up 9-10% and operating income to be around 38%. Through 2/28/14, the company generated $626 million in free cash flow of which $383 million was paid back to shareholders through dividends. This represents a dividend coverage ratio of 1.6x. During the first nine months of fiscal 2014, the company repurchased 5 million shares for $203 million and still has $147 million left under its current authorization.

Paychex is an excellently run company. Their business model generates tremendous amounts of free cash flow that management is dedicated to return to shareholders. With a dividend yield of 3.4%, zero debt, increasing revenue and nearly a billion dollars in cash, the company represents a good investment for the conservative investor. The company won't generate huge revenue growth year over year, but their consistent business model and rock solid balance sheet offers good returns and excellent downside protection.


Investors worried about a market correction and trying to find fundamentally strong stocks should consider both Garmin and Paychex. Individuals who are debt free know what an advantage it is compared to trying to pay down credit cards and loans every month. Debt is never a problem until it becomes one. For these companies, it will never become a problem. If Garmin had a large debt load with its flat to declining revenues, it could have severely damaged the company. Instead, since the company responsibly managed its balance sheet, the company has weathered a tough couple of sales years without any major scars to show. These companies have the financial flexibility to return value to shareholders through dividends and share buybacks without having to worry about increasing its debt load. During bull markets a solid balance sheet may get ignored, but when bear markets start investors will be scouring for clean balance sheets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.