11 Dividend Stocks With LBO Characteristics

by: Whopper Investments

With a new buyout being announced (seemingly) every day, I thought it might be worth looking into stocks that might be LBO (leveraged buy out) candidates. I started off by taking the Russell 1000 and sorting it so I only included stocks with net cash on their balance sheet. This shows an underleveraged balance sheet that private equity could exploit in a buyout. Then, I looked for stocks with 15%+ returns on invested capital (private equity loves strong returns on capital), a low multiple to allow for a deal to be reached, and a dividend yield (showing the company's confidence in future cash flows, plus paying investors to wait while for the buyout). After performing this search, I ended up with the following 11 candidates.

Ticker Short Name Dvd Yld EV/TTM EBIT Op ROIC
HRB H&R BLOCK INC 3.58 8.42 21.04
FL FOOT LOCKER INC 3.35 8.05 15.13
MHP MCGRAW-HILL COS 2.54 7.75 42.66
MSFT MICROSOFT CORP 2.52 7.69 50.54
GRMN GARMIN LTD 4.73 7.25 21.70
BMY BRISTOL-MYER SQB 4.99 7.20 31.81
RAI REYNOLDS AMERICA 5.97 7.20 24.11
CVX CHEVRON CORP 2.68 7.14 20.45
AEO AMER EAGLE OUTF 2.77 7.11 21.40
LO LORILLARD INC 5.47 6.82 254.42
INTC INTEL CORP 3.59 6.10 33.23

That's a pretty diverse list, running the range from tech stocks to tax stocks. Let's take a bit of a closer look at some of the stocks on the list

H&R Block (NYSE:HRB) - the company has been one of the biggest YTD winners, as investors overcame fears from the loss of Refund Anticipation Loans (RALs). I've already highlighted them as a dividend stock with magic formula characteristics, and there's been recent speculation that Eddie Lampert's stake in them could lead to a takeover.

Foot Locker (NYSE:FL) -The company has enjoyed rapid sales and earnings growth as the consumer has returned from the dead. Sales have sold off on fears of margin compression, but with strong ROIC, a cheap valuation, and the retail sector in private equities cross hairs, the company could make a buyout target.

McGraw-Hill (MHP) - One of Joel Greenblatt's favorite stocks, the company has a great moat and a history of strong dividend growth.

Microsoft (NASDAQ:MSFT) - The company's share price has been flat for years, but at this point they could represent a compelling bargain. While likely too big for a LBO, they have all the classic signs for private equity: strong moat, consistent cash flows, great ROIC, and a cash rich balance sheet.

Garmin (NASDAQ:GRMN)- The GPS company has gone from high flying growth stock to deep value candidate in record time as its market share has been eroded by smartphones. Still, there could be value yet in the company, as their strong brand and cash flows could give them a way to shift to faster growing markets.

Intel (NASDAQ:INTC) - Fears over the company's future in a smartphone / tablet world have caused the shares to trade for record low valuations. However, that's attracted the attention of some value minded investors, and the company has a proven history of increasing share holder value and rising to the challenges of new technologies.

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