6 Highly Profitable Companies With Impressive Dividend Coverage

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 |  Includes: BMRC, CSX, KLAC, MTSC, NSM, TXN
by: Kapitall

For an income-oriented investor, dividends are only as attractive as they are sustainable. When a company offers a high dividend yield, potential investors should pause and determine whether the company may actually be able to continue those payments into the future.

Just because a stock offers a high dividend yield doesn't mean that the company will have the resources to continue paying the dividend – this is why profitability and cash flow analyses are vital when choosing a stock for its dividend.

In this screen we searched for stocks with significant dividends (dividend yield above 1.5%) that appeared to meet several sustainability requirements.

We began with cash flow coverage of the current year’s dividend by finding the ratio of trailing twelve month (TTM) cash flow per share to the current year’s estimate of dividend per share – all stocks listed have a ratio above 3.

We then screened for stocks with payout ratios not exceeding 35%. And finally, we screened for stocks that were also highly profitable, beating their industry averages of TTM gross, operating, and pre-tax margins.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.

This list ultimately reports 6 stocks with significant dividends that met sustainability requirements related to dividend coverage, profitability, and payout ratio.

Do you think these stocks are offering attractive dividends? Use this list as a starting-off point for your own analysis.

List sorted by cash flow / dividend ratio.

1. Texas Instruments Inc. (NASDAQ:TXN): Semiconductor Industry. Market cap of $38.90B. Dividend yield at 1.55%. Trailing twelve month cash flow per share at $3.46 vs. current year dividend per share estimate at $0.52 (implies a cash flow / dividend ratio of 6.6). Payout ratio at 18.41%. Gross margin (TTM) at 59.71% vs. industry avg. of 58.83%. Operating margin (TTM) at 30.78% vs. industry avg. of 25.14%. Pretax margin (TTM) at 31.88% vs. industry avg. of 24.63%. The stock has gained 40.87% over the last year.

2. CSX Corp. (NASDAQ:CSX): Railroads Industry. Market cap of $27.84B. Dividend yield at 1.90%. Trailing twelve month cash flow per share at $6.97 vs. current year dividend per share estimate at $1.19 (implies a cash flow / dividend ratio of 5.9). Payout ratio at 22.57%. Gross margin (TTM) at 38.38% vs. industry avg. of 36.53%. Operating margin (TTM) at 29.59% vs. industry avg. of 25.92%. Pretax margin (TTM) at 24.49% vs. industry avg. of 22.57%. The stock has gained 54.1% over the last year.

3. Bank of Marin Bancorp (NASDAQ:BMRC): Regional Banks Industry. Market cap of $186.20M. Dividend yield at 1.83%. Trailing twelve month cash flow per share at $3.08 vs. current year dividend per share estimate at $0.65 (implies a cash flow / dividend ratio of 4.8). Payout ratio at 21.62%. Gross margin (TTM) at 84.48% vs. industry avg. of 68.91%. Operating margin (TTM) at 50.60% vs. industry avg. of 37.55%. Pretax margin (TTM) at 35.12% vs. industry avg. of 20.24%. The stock has gained 11.32% over the last year.

4. KLA-Tencor Corporation (NASDAQ:KLAC): Semiconductor Equipment & Materials Industry. Market cap of $6.84B. Dividend yield at 2.46%. Trailing twelve month cash flow per share at $4.37 vs. current year dividend per share estimate at $1.00 (implies a cash flow / dividend ratio of 4.4). Payout ratio at 22.78%. Gross margin (TTM) at 63.73% vs. industry avg. of 58.83%. Operating margin (TTM) at 35.62% vs. industry avg. of 25.14%. Pretax margin (TTM) at 32.59% vs. industry avg. of 24.63%. The stock has gained 38.5% over the last year.

5. National Semiconductor Corporation (NSM): Semiconductor Industry. Market cap of $5.97B. Dividend yield at 1.63%. Trailing twelve month cash flow per share at $1.61 vs. current year dividend per share estimate at $0.39 (implies a cash flow / dividend ratio of 4.1). Payout ratio at 27.76%. Gross margin (TTM) at 74.22% vs. industry avg. of 58.83%. Operating margin (TTM) at 32.59% vs. industry avg. of 25.14%. Pretax margin (TTM) at 26.92% vs. industry avg. of 24.63%. The stock has gained 84.46% over the last year.

6. MTS Systems Corp. (NASDAQ:MTSC): Scientific & Technical Instruments Industry. Market cap of $616.67M. Dividend yield at 2.02%. Trailing twelve month cash flow per share at $2.92 vs. current year dividend per share estimate at $0.80 (implies a cash flow / dividend ratio of 3.6). Payout ratio at 32.37%. Gross margin (TTM) at 45.83% vs. industry avg. of 36.93%. Operating margin (TTM) at 13.69% vs. industry avg. of 9.46%. Pretax margin (TTM) at 11.61% vs. industry avg. of 10.31%. The stock has gained 36.45% over the last year.

*Dividend and cash flow data sourced from Screener.co, profitability data sourced from Fidelity, 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.