8 Growing Companies With High Yields, Low Debt, And Reasonable Valuations

Includes: LEG, LINC, LLY, LO, NPK, PXD, RAI, T
by: Lenny Grover

We can use the Screener.co stock screener to find attractive investment opportunities for income-oriented investors. To do this, we first limit our scope to US-markets and then employ the following conditions:

Current year dividend per share estimate / Price-closing or last bid
Current year dividend per share estimate
Dividends per share-trailing 12 month
Total Debt(I)
EPS Change-TTM over TTM
Revenue Change-TTM over TTM

We require at least a 2% forward yield, stable or growing dividends, stable or growing revenue and EPS, manageable debt loads (using a conservative debt threshold of less than 2x annual EBITDA) and an EV/EBITDA ratio of less than 10. Many of the 81 companies returned by this screen, as of 4/12/2011, are foreign company ADRs that may be subject to different dividend tax rates than US-based companies. For the sake of simplicity, lets sort by forward dividend yield, eliminate the ADRs and other foreign companies, and look at the a selection of the top results:

Company Name
National Presto Industries Inc.
Lincoln Educational Services Corporation
Pioneer Southwest Energy Partners L.P.
Reynolds American, Inc.
AT+T Inc.
Eli Lilly + Co.
Lorillard Inc.
Leggett + Platt, Inc.

National Presto Industries (NYSE:NPK) was covered in depth in a previous Seeking Alpha article published on 3/29/2011. With a forward estimated dividend yield of 7.6% for the current yield, it is the highest yielding US company on our list. In addition, the company has no debt and is trading at only a 5.6x EV/EBITDA ratio. The combination of a high yield, healthy balance sheet, and attractive valuation makes NPK interesting.

Lincoln Educational Services (NASDAQ:LINC) is a for-profit education company. These firms have come under regulatory scrutiny since a damning Department of Education report was published late last year describing the low graduation, loan repayment, and successful job placement rates at for-profit colleges. With a 6% yield, low debt level, and 2.4x EV/EBITDA ratio, there are many things to like about the company's financials. However, there is a lot of uncertainty in the for-profit education sector right now, and if you are an income-seeking investor that values stability, this may not be the most attractive opportunity for you. If you have a more speculative risk-profile, this may be an interesting opportunity.

Pioneer Southwest Energy Partners (PSE) is a US-based oil and natural gas limited partnership. It is expected to yield 6.0% this year but has a 9.5x EV/EBITDA ratio and has benefited from the run-up in oil and gas prices. A bet on any of these energy trusts is essentially a bet on the continued strength in commodity prices as the income it produces will depend heavily on the value of the oil and gas produced by the wells. I have traditionally avoided these companies because I tend to prefer to invest in companies with less exposure to commodity prices. However, if you are looking for a way to bet on commodities while generating a healthy yield, PSE may be an opportunity for you.

Reynolds American (NYSE:RAI) and Lorillard (NYSE:LO) are cigarette companies. RAI is expected to yield 5.8% and is has an 8.9x EV/EBITDA ratio while LO is expected to yield 5.1% and has a 7.7x EV/EBITDA ratio. Personally, I think those valuation multiples are high, despite both companies meeting our growth criteria, because the market for cigarettes is one that is in long-term decline. As such, these companies appear about as attractive to me as stained teeth, cancer-riddled lungs, and bad breath!
The financials for AT&T (NYSE:T) do not yet reflect the pending AT&T/T-Mobile merger. In addition, since Verizon (NYSE:VZ) is now able to carry the iPhone, I cannot imagine the outlook for AT&T looks good once current iPhone users' contracts come up. As a US cell phone customer, I evaluated AT&T's pricing before renewing my T-Mobile contract. Their voice and data rates were priced at a premium to other carriers and it is my belief that they will need to be more aggressive on pricing in the future. As such, I am taking a wait-and-see attitude on AT&T until there is less uncertainty around pricing and renewal rates.

Eli Lilly (NYSE:LLY) is a pharmaceutical company that is yielding 5.5% and is trading at a 5.4x EV/EBITDA ratio. Pharma companies like AZN and LLY seem to be trading at a discount that reflects the uncertainty of whether drug manufacturers will be able to maintain their pricing and margins. I think LLY looks attractive at these levels and will continue to monitor the company.

Leggett + Platt (NYSE:LEG) is a design and engineering firm. It is yielding 4.7% and is trading at an EV/EBITDA ratio of 9.5x. The company recorded impressive 56% EPS growth and 10.0% revenue growth TTM over TTM. Given its current valuation metrics, it looks like a growth company trading at a growth valuation. However, looking at the company's historical financials, its 2010 revenue and gross margin are below 2008 levels. As such, it appears to be more of a cyclical company than a growth play and I cannot justify paying a 9.5x EV/EBITDA ratio.

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