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One way to search for potentially undervalued firms is by using the ratio levered free cash flow/enterprise value. Companies with high ratios may be undervalued.

Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm’s value from all ownership sources: market cap, outstanding debt, and preferred shares. From this value we subtract cash holdings because, in the event of a takeover, that cash would be used towards the takeover price.

We used this ratio to screen for potentially undervalued stocks among the universe of low-debt dividend stocks, paying dividend yields above 2% and sustainable payout ratios below 35%.

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.

We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.

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

List sorted by levered free cash flow/enterprise value.

1. Axis Capital Holdings Ltd. (NYSE:AXS): Property & Casualty Insurance Industry. Market cap of $3.79B. Dividend yield at 3.14%, payout ratio at 30.42%. MRQ total debt to assets at 0.05. Levered free cash flow/enterprise value at 0.36 (levered free cash flow at $1.54B and enterprise value at $4.23B). The stock is currently stuck in a downtrend, trading 7.17% below its SMA20, 8.19% below its SMA50, and 16.51% below its SMA200. The stock has had a couple of great days, gaining 5.54% over the last week.

2. HCC Insurance Holdings Inc. (NYSE:HCC): Property & Casualty Insurance Industry. Market cap of $3.11B. Dividend yield at 2.06%, payout ratio at 23.35%. MRQ total debt to assets at 0.04. Levered free cash flow/enterprise value at 0.22 (levered free cash flow at $726.81M and enterprise value at $3.26B). The stock has had a couple of great days, gaining 10.29% over the last week.

3. WPP plc (NASDAQ:WPPGY): Advertising Agencies Industry. Market cap of $13.01B. Dividend yield at 3.76%, payout ratio at 34.34%. MRQ total debt to assets at 0.16. Levered free cash flow/enterprise value at 0.22 (levered free cash flow at $2.06B and enterprise value at $9.50B). The stock is currently stuck in a downtrend, trading 8.19% below its SMA20, 13.79% below its SMA50, and 17.74% below its SMA200. The stock has had a couple of great days, gaining 6.31% over the last week. The stock has performed poorly over the last month, losing 10.4%.

4. Artio Global Investors Inc. (NYSE:ART): Asset Management Industry. Market cap of $529.34M. Dividend yield at 2.71%, payout ratio at 16.56%. MRQ total debt to assets at 0.12. Levered free cash flow/enterprise value at 0.21 (levered free cash flow at $104.58M and enterprise value at $500.17M). The stock is a short squeeze candidate, with a short float at 8.15% (equivalent to 7.55 days of average volume). The stock is currently stuck in a downtrend, trading 12.08% below its SMA20, 21.06% below its SMA50, and 38.49% below its SMA200. The stock has had a couple of great days, gaining 6.47% over the last week. The stock has performed poorly over the last month, losing 14.2%.

5. Tower Group Inc. (NASDAQ:TWGP): Property & Casualty Insurance Industry. Market cap of $953.24M. Dividend yield at 3.30%, payout ratio at 32.48%. MRQ total debt to assets at 0.09. Levered free cash flow/enterprise value at 0.19 (levered free cash flow at $238.70M and enterprise value at $1.26B). The stock is a short squeeze candidate, with a short float at 10.99% (equivalent to 15.42 days of average volume). The stock has had a couple of great days, gaining 6.89% over the last week.

6. MKS Instruments Inc. (NASDAQ:MKSI): Diversified Machinery Industry. Market cap of $1.21B. Dividend yield at 2.60%, payout ratio at 20.38%. MRQ total debt to assets at 0.00. Levered free cash flow/enterprise value at 0.18 (levered free cash flow at $128.07M and enterprise value at $718.28M). The stock is currently stuck in a downtrend, trading 8.69% below its SMA20, 10.55% below its SMA50, and 14.92% below its SMA200. The stock has gained 19.9% over the last year.

7. Ameriprise Financial Inc. (NYSE:AMP): Asset Management Industry. Market cap of $10.40B. Dividend yield at 2.09%, payout ratio at 18.21%. MRQ total debt to assets at 0.06. Levered free cash flow/enterprise value at 0.17 (levered free cash flow at $2.54B and enterprise value at $15.28B). Might be undervalued at current levels, with a PEG ratio at 0.71, and P/FCF ratio at 11.14. The stock is currently stuck in a downtrend, trading 15.27% below its SMA20, 22.15% below its SMA50, and 28.07% below its SMA200. The stock has had a couple of great days, gaining 6.97% over the last week. The stock has performed poorly over the last month, losing 17.13%.

8. Kansas City Life Insurance Company (NASDAQ:KCLI): Life Insurance Industry. Market cap of $347.20M. Dividend yield at 3.58%, payout ratio at 27.70%. MRQ total debt to assets at 0.00. Levered free cash flow/enterprise value at 0.16 (levered free cash flow at $47.92M and enterprise value at $304.12M). The stock has gained 0.77% over the last year.

9. Applied Materials Inc. (NASDAQ:AMAT): Semiconductor Equipment & Materials Industry. Market cap of $15.32B. Dividend yield at 2.76%, payout ratio at 21.57%. MRQ total debt to assets at 0.02. Levered free cash flow/enterprise value at 0.14 (levered free cash flow at $1.65B and enterprise value at $12.19B). The stock is currently stuck in a downtrend, trading 8.25% below its SMA20, 11.01% below its SMA50, and 20.5% below its SMA200. The stock has gained 4.4% over the last year.

10. Gap Inc. (NYSE:GPS): Apparel Stores Industry. Market cap of $9.04B. Dividend yield at 2.75%, payout ratio at 27.47%. MRQ total debt to assets at 0.16. Levered free cash flow/enterprise value at 0.13 (levered free cash flow at $1.01B and enterprise value at $7.82B). Might be undervalued at current levels, with a PEG ratio at 0.94, and P/FCF ratio at 11.05. The stock is currently stuck in a downtrend, trading 12.61% below its SMA20, 13.63% below its SMA50, and 23.37% below its SMA200. The stock has had a couple of great days, gaining 5.73% over the last week. The stock has performed poorly over the last month, losing 14.79%.

11. General Dynamics Corp. (NYSE:GD): Aerospace/Defense Products & Services Industry. Market cap of $22.39B. Dividend yield at 3.05%, payout ratio at 25.53%. MRQ total debt to assets at 0.10. Levered free cash flow/enterprise value at 0.13 (levered free cash flow at $2.96B and enterprise value at $23.41B). The stock is currently stuck in a downtrend, trading 10.64% below its SMA20, 15.88% below its SMA50, and 17.88% below its SMA200. The stock has had a couple of great days, gaining 6% over the last week. The stock has performed poorly over the last month, losing 11.51%.

12. Northrop Grumman Corporation (NYSE:NOC): Aerospace/Defense Industry. Market cap of $14.67B. Dividend yield at 3.80%, payout ratio at 26.73%. MRQ total debt to assets at 0.16. Levered free cash flow/enterprise value at 0.12 (levered free cash flow at $1.97B and enterprise value at $15.84B). The stock is a short squeeze candidate, with a short float at 6.34% (equivalent to 5.51 days of average volume). The stock is currently stuck in a downtrend, trading 12.18% below its SMA20, 19.58% below its SMA50, and 17.39% below its SMA200. The stock has had a couple of great days, gaining 5.33% over the last week. The stock has performed poorly over the last month, losing 18.09%.

13. Cato Corp. (NYSE:CATO): Apparel Stores Industry. Market cap of $720.39M. Dividend yield at 3.04%, payout ratio at 17.06%. MRQ total debt to assets at 0.00. Levered free cash flow/enterprise value at 0.11 (levered free cash flow at $49.40M and enterprise value at $458.98M). Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 3.77%, current ratio at 2.68, and quick ratio at 1.92. The stock is a short squeeze candidate, with a short float at 6.57% (equivalent to 8.59 days of average volume). The stock is currently stuck in a downtrend, trading 10.95% below its SMA20, 13.77% below its SMA50, and 8% below its SMA200. The stock has performed poorly over the last month, losing 18.08%.

14. KLA-Tencor Corporation (NASDAQ:KLAC): Semiconductor Equipment & Materials Industry. Market cap of $6.04B. Dividend yield at 2.77%, payout ratio at 17.10%. MRQ total debt to assets at 0.16. Levered free cash flow/enterprise value at 0.11 (levered free cash flow at $502.01M and enterprise value at $4.75B). The stock is currently stuck in a downtrend, trading 10.33% below its SMA20, 12.36% below its SMA50, and 16.36% below its SMA200. The stock has performed poorly over the last month, losing 13.87%.

15. Meredith Corp. (NYSE:MDP): Publishing Industry. Market cap of $1.18B. Dividend yield at 3.94%, payout ratio at 28.16%. MRQ total debt to assets at 0.11. Levered free cash flow/enterprise value at 0.10 (levered free cash flow at $139.74M and enterprise value at $1.34B). The stock is a short squeeze candidate, with a short float at 32.06% (equivalent to 13.24 days of average volume). The stock is currently stuck in a downtrend, trading 11.35% below its SMA20, 17.08% below its SMA50, and 25.48% below its SMA200. The stock has had a couple of great days, gaining 6.97% over the last week. The stock has performed poorly over the last month, losing 13.22%.

16. Lockheed Martin Corporation (NYSE:LMT): Aerospace/Defense Products & Services Industry. Market cap of $23.89B. Dividend yield at 4.23%, payout ratio at 34.77%. MRQ total debt to assets at 0.14. Levered free cash flow/enterprise value at 0.10 (levered free cash flow at $2.58B and enterprise value at $25.23B). The stock is currently stuck in a downtrend, trading 5.53% below its SMA20, 9.98% below its SMA50, and 8.24% below its SMA200. The stock has had a couple of great days, gaining 6.46% over the last week.

*Levered free cash flow and enterprise value data sourced from Yahoo Finance, total debt to asset data sourced from Screener.co, all other data sourced from Finviz.

Source: 16 Low-Debt Dividend Stocks Undervalued by Levered Free Cash Flow