Income Ideas: 8 Dividend Champions With Healthy Levered Free Cash Flows

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Includes: CB, CTL, IRET, ORI, PBI, RLI, SPGI, TGT
by: Kapitall

When searching for companies that pay reliable dividends, it’s important to consider the free cash flow that the company is generating – after all, dividends are paid from free cash flow.

On that note, we wanted to see which historical dividend champions (i.e. those that have increased their dividend for 25+ consecutive years) are best positioned today, by looking at levered free cash flow as a percentage of market cap.

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Levered free cash flow is the free cash flow available after paying interest to bondholders and re-paying any principal as it comes due. From this cash flow, the Board can decide to pay all or some in dividends to shareholders, or re-invest the money back into the firm to support growth.

We ultimately found 8 companies with levered FCF above 10% of market cap, indicating significant flexibility in paying dividends (and potentially undervalued levels). These companies are presented below – use this list as a starting-off point for your own analysis into income investments.

List sorted by levered FCF as a percentage of market cap.

1. Old Republic International Corp. (NYSE:ORI): Surety & Title Insurance Industry. Market cap of $3.37B. Dividend yield at 5.39%. TTM levered free cash flow at $1.96B, which is 58.25% of market cap. The stock has lost 3.71% over the last year.

2. The Chubb Corporation (NYSE:CB): Property & Casualty Insurance Industry. Market cap of $18.12B. Dividend yield at 2.53%. TTM levered free cash flow at $7.07B, which is 39.01% of market cap. CB has a relatively low correlation to the market (beta = 0.48), which may be appealing to risk-averse investors. The stock has gained 20.28% over the last year.

3. RLI Corp. (NYSE:RLI): Property & Casualty Insurance Industry. Market cap of $1.23B. Dividend yield at 1.99%. TTM levered free cash flow at $463.57M, which is 37.81% of market cap. Risk-averse investors may appreciate that RLI has a relatively low correlation to the market (beta = 0.41). The stock is a short squeeze candidate, with a short float at 7.7% (equivalent to 16.12 days of average volume). The stock has gained 13.81% over the last year.

4. Pitney Bowes Inc. (NYSE:PBI): Business Equipment Industry. Market cap of $5.09B. Dividend yield at 5.92%. TTM levered free cash flow at $840.51M, which is 16.50% of market cap. Short float at 7.83% (equivalent to 7.27 days of average volume), indicating the stock is a short squeeze candidate. The stock has gained 6.07% over the last year.

5. Investors Real Estate Trust (NASDAQ:IRET): REIT. Market cap of $741.36M. Dividend yield at 7.47%. TTM levered free cash flow at $87.65M, which is 11.82% of market cap. IRET has a relatively low correlation to the market (beta = 0.38), which may be appealing to risk-averse investors. The stock has gained 12.93% over the last year.

6. CenturyLink, Inc. (NYSE:CTL): Telecom Services Industry. Market cap of $12.18B. Dividend yield at 7.22%. TTM levered free cash flow at $1.37B, which is 11.25% of market cap. Risk-averse investors may appreciate that CTL has a relatively low correlation to the market (beta = 0.74). Short float at 10.31% (equivalent to 6.53 days of average volume), indicating the stock is a short squeeze candidate. The stock has gained 18.47% over the last year.

7. The McGraw-Hill Companies, Inc. (MHP): Publishing Industry. Market cap of $11.87B. Dividend yield at 2.56%. TTM levered free cash flow at $1.32B, which is 11.12% of market cap. The stock has gained 9.12% over the last year.

8. Target Corp. (NYSE:TGT): Discount, Variety Stores Industry. Market cap of $34.96B. Dividend yield at 1.98%. TTM levered free cash flow at $3.81B, which is 10.90% of market cap. The stock has lost 9.56% over the last year.

*Dividend champions sourced from DRiP Investing Resource Center, levered free cash flow sourced from Yahoo! Finance, all other data sourced from Finviz.

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