6 Safe Dividend Stocks With Strong Value Characteristics

by: Vince Martin

When investing for income, it is of course necessary to look beyond dividend yield at the underpinnings of the dividend and the company itself. Is the dividend secure for the short term? Will future cash flows cover stable, or even increased dividend payments? And is there a possibility of principal appreciation in addition to our income?

The following list offers 6 profitable companies with little or no debt, strong cash positions, and solid dividend yields. These companies appear undervalued on an enterprise basis and thus, not only provide security of income, but a real chance for capital appreciation.

1. American Eagle Outfitters (NYSE:AEO)
  • Closing Price 7/8: $13.88
  • Dividend Yield: 3.17%

AEO has had a nice bounce off of 10-month lows set in June, pushing up about 10%, thanks in large part to strong same-store sales from not only AEO, but Target (NYSE:TGT), the Limited, and others. Going forward, strong improvement on the top line should be joined by lowered expenses, particularly if the price of cotton continues to fall back.

With $3.11/share in cash net of liabilities, and a payout ratio of 43% based on the company's FY 2012 guidance, AEO's dividend looks safe. And with 30% of the share price in cash, AEO is trading at a forward enterprise value-to-earnings ratio just over ten (Cash flow numbers are more impressive; AEO currently trades at an EV-FCF ratio under 7.) Earnings are expected to be flat going forward (according to analysts surveyed by Reuters Finance) but any economic rebound or further drop in cotton prices could lead to growth in the underlying stock. (Seeking Alpha's Geordy Wang lays out the detailed bull case for AEO here.)

2. Intel Corporation (NASDAQ:INTC)
  • Closing Price: 7/8: $23.09
  • Dividend Yield: 3.64%

Yes, Intel is now a value stock, which I think means we're all getting old. Intel has $1.23/share in cash net of debt, and its payout ratio on a ttm basis is about 38.5%, both figures very solid for such a strong yield

Intel's fundamentals are outstanding: forward P/E below ten, enterprise P/E right at ten, price to free cash flow of about 11. The company is buying back shares as well. There are concerns with the cyclical nature of semiconductor demand, as even CEO Paul Otellini discussed in Intel's Q1 conference call in April. Indeed, the SOX (Philadelphia Semiconductor Index), the most-followed barometer of semiconductor stocks, is off 10% from its February highs. And while a cyclical drop in demand may weigh on Intel's topline, despite that, analysts surveyed by Reuters Finance expect earnings growth in FY11 and FY12, plus a long-term growth rate of 11%.

3. US Global Investors (NASDAQ:GROW)
  • Closing Price 7/8: $8.16
  • Dividend Yield: 2.94%

US Global Investors is a boutique investment firm offering investment advisory and mutual funds, primarily in emerging markets and natural resources. And while they are a very small firm (market cap is only $120MM), they have been around since 1968, and publicly traded since 1984.

GROW offers a yield just under 3% (thanks to a 10% runup over the past week, on no news), based on monthly payments of .02/share. The company has over $2/share in cash and a ttm payout ratio of 51%. While that may be a touch high, earnings are forecast to rise in FY11 and FY12 (based on a single analyst), and the company's cash balance should cushion any potential dividend cuts. The June payment marked the company's 48th consecutive monthly payment.

GROW offers solid fundamentals as well; 25% of market cap in cash, earnings growth, and good multiples. The company was able to remain profitable even amidst the 2009 downturn, but revenues have not recovered (still off some 30% from 2007-2008 highs). But the company has grown well out of the downturn (assets under management were up 20% yoy after the most recent quarter), has a history of success, and looks poised to offer good returns.

4. PetMed Express (NASDAQ:PETS)
  • Closing Price 7/8: $12.28
  • Dividend Yield: 4.07%

PetMed Express is the owner of 1-800-PETMEDS and 1800petmeds.com, offering home delivery of pet pharmaceuticals, food, and supplies. PETS is the most speculative stock on this list; their payout ratio on a ttm basis is already at 54%, with the majority of analysts foreseeing earnings decreases ahead. The big issue? Competition, particularly from Amazon (NASDAQ:AMZN) and other online retailers.

That said, PETS offers some compelling points, most notably in its free cash flow. PetMed Express earned about one-seventh of its enterprise value in free cash flow for the year ending March 31st, while growing cash flow 13% from the year before. Without question, competition is fierce, with this week's rollout of wag.com from an Amazon subsidiary adding to the existing battles with Amazon.com and the e-commerce presence of retailers PetSmart and Petco. But they are competing in a growing market, one that now has reached $55 billion a year in annual spending. PETS does offer $2.76/share in cash, enough cushion to avoid payout ratio worries for the near future, particularly since its business lacks the need for capital-intensive expenses.

5. Superior Industries (NYSE:SUP)
  • Closing Price 7/8: $22.26
  • Dividend Yield: 2.88%

Superior Industries designs and manufactures aluminum wheels for the automotive industry. SUP offers over $6/share in cash, with a payout ratio of 34% based on trailing earnings of $1.89/share; all numbers that support the safety of a 64-cent annual dividend. While the dividend has been flat since 2005, it was not skipped through the terrible automotive market of 2008-2010, and indeed has been paid without exception since 1990.

Superior offers tremendous fundamentals; with the $6-plus in share per cash, it trades an enterprise value to earnings ratio of just 8.3. A weakened economy may hurt sales to GM, Ford (NYSE:F), and the rest, but there is still room for growth and optimism in the auto industry. In addition, the increasing popularity of custom, outsized, and more stylish (and more expensive) wheels has created a much larger consumer market for Superior.

6. Cato Corporation (NYSE:CATO)
  • Closing Price 7/8: $28.65
  • Dividend Yield: 3.21%

Cato's long bull run from mid-March lows finally tripped up this week, after disappointing same-store June sales amidst a strong month for the retail sector as a whole. The stock pulled back some 10% before rebounding on Friday.

Cato's payout ratio stands at 43%, with nearly $9 per share in cash, which should support a dividend that the company raised 24% in March. (Cato has paid dividends almost without interruption since 1988.)

Despite the recent 20% runup, Cato still offers some compelling reasons to buy. The large cash-per-share balance gives it an enterprise value-to-earnings ratio of a little bit over 9, while the company has almost doubled earnings since 2008 and grown revenue through the recent downturn. Operating cash flow has stayed consistent at about 10-12% of enterprise value through the past four years as well.

Short interest is over 13 days, and the sharp run-up of the last six weeks may not hold up, so a long-term investor may want to stay patient for a more attractive entry point. But Cato looks like a strong choice for income investors seeking safe payouts over 3%.

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