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One of the screens that we have implemented using the Screener.com Equity Research Platform looks for US exchange-traded companies that have stable or growing earnings and dividends, at least a 1% yield, debt less than its most recent annual EBITDA, a P/E ratio less than 20, and an EV/EBITDA ratio of less than 6. This screen produces a list of companies that offer decent yields while trading at reasonable valuations and having comfortable levels of debt. The full list of conditions are:

Field
op
Criteria
Exchange Country
=
"USA"
Exchange Traded On
!=
"Over The Counter"
Current year dividend per share estimate
>=
Current Dividend Yield-Common Stock Primary Issue, LFI-Annualized
Current long term growth of EPS rate
>=
0
Current year dividend per share estimate / Price-closing or last bid
>
0.01
Total Debt(I)
<=
EBITDA(A)
Current P/E Excluding Extraordinary Items-LTM
<
20
Current EV/EBITDA
<
6

This screen narrows the universe of companies to example from 6,000+ US exchange-traded companies to 71, as of 9/5/2011. From that list, there are 11 companies that look interesting:

  • Marathon Oil (MRO)
  • Texas Instruments (TXN)
  • ConocoPhillips (COP)
  • Intel Corporation (INTC)
  • Exxon Mobil (XOM)
  • Williams-Sonoma (WSM)
  • Microsoft (MSFT)
  • Lockheed Martin (LMT)
  • The Gap (GPS)
  • Best Buy (BBY)
  • American Eagle Outfitters (AEO)

The first observation relating to this list is that 3 of the 11 are oil companies. Given the high prices for commodities relative to historical levels, it makes sense that investors are valuing companies whose revenues and profits are linked to commodities prices at a discount. Whether that discount is warranted depends on whether commodities prices return to more normal levels or remain high for an extended period of time. Your analysis of that factor is crucial to determining whether any of the oil companies are worth investing in.

Marathon Oil is an oil company with a market capitalization of $18.4 billion. It had TTM revenue of $63.7 billion, and has an expected annual yield of 2.7%. Its expected annual dividend rate is expected to be 69.6% of what it was during the trailing-twelve-month period. The company's EV/EBITDA ratio is 2.2x and its EV/Revenue ratio is 0.3x. MRO grew revenue 67.5% TTM over TTM and over the trailing-twelve-month period. Looking at the balance sheet, the company has net tangible assets of $16.2 billion and its total debt represents 61.3% of its EBITDA over the most recent fiscal year.

It looks like the company's impressive TTM/TTM revenue growth is a function of its unusually strong quarter ending in September 2010 that has not resulted in similarly high revenue on a consistent basis. That is likely why its forward dividend rate is expected to be noticeably lower than its TTM dividend rate and why its trailing valuation multiples appear depressed. This is a perfect example of why you generally need to look more deeply at the results returned by your screens. Evaluating MRO would require looking more deeply at its projected financials instead of its historical numbers, as its performance during the TTM period appears to be an aberration.

Texas Instruments is a semiconductor company with a market capitalization of $29.0 billion. It had TTM revenue of $14.1 billion, and has an expected annual yield of 2.1%. Its annual dividend rate is expected to be 102.3% of what it was during the trailing-twelve-month period. TXN's EV/EBITDA ratio is 5.0x and its EV/Revenue ratio is 1.8x. The company grew revenue 12.1% TTM over TTM and over the trailing-twelve-month period. TXN has net tangible assets of $9.7 billion and its total debt represents 64.5% of its EBITDA over the most recent fiscal year.

TXN offers a healthy yield with earnings that are more than twice the dividends it paid over the trailing-twelve-month period. It reported double-digit revenue growth and expects to pay more in dividends during the current year than in the trailing-twelve-month period. Texas Instruments has a strong market position and a 5.0x EV/EBITDA ratio is still an attractive valuation multiple. Nevertheless, I have been burned by the fierce cyclicality of the semiconductor market and would want an even lower valuation multiple given the risk that we might be headed for a recession in the short to medium term.

ConocoPhillips is an oil company with a market capitalization of $91.2 billion. It had TTM revenue of $228.0 billion, and has an expected annual yield of 3.9%. COP's expected annual dividend rate is expected to be 108.0% of what it was during the trailing-twelve-month period. The company's EV/EBITDA ratio is 3.4x and its EV/Revenue ratio is 0.5x. It grew revenue 26.1% TTM over TTM and over the trailing-twelve-month period its dividends paid represented 72.5% of net income over the period. The company has net tangible assets of $65.7 billion and its total debt represents 77.1% of its EBITDA over the most recent fiscal year. ConocoPhillips' increasing annual dividend rate, very low EV/EBITDA ratio, and substantial TTM/TTM revenue growth all look attractive.

I am a little concerned that debt is 77.1% of fiscal year EBITDA given the unusually high oil prices. A reduction in oil prices would likely cause COP's EBITDA to contract, make its debt more difficult to service, and force it to cut its dividend rate. However, it looks like investors are being compensated for that risk since the company has such a low EV/EBITDA ratio. Nevertheless, I remain cautious about oil companies as commodity price volatility is likely to drive their earnings in the short term as much or more than the performance of the underlying business operations.

Intel Corporation is a semiconductor company with a market capitalization of $103.1 billion. It had TTM revenue of $48.4 billion, and has an expected annual yield of 3.9%. INTC's expected annual dividend rate is expected to be 113.9% of what it was during the trailing-twelve-month period. The company's EV/EBITDA ratio is 4.4x and its EV/Revenue ratio is 1.9x. The company grew revenue 18.1% TTM over TTM and over the trailing-twelve-month period. The company has net tangible assets of $32.9 billion and its total debt represents 10.8% of its EBITDA over the most recent fiscal year. I am long INTC because of its low EV/EBITDA ratio, strong balance sheet, dominant market position, and the fact that it remained highly profitable despite the substantial drop in IT spending during the last recession. And having a yield of almost 4% certainly doesn't hurt.

Exxon Mobil is an oil company with a market capitalization of $350.8 billion. It had TTM revenue of $440.0 billion, and has an expected annual yield of 2.6%. The company's expected annual dividend rate is expected to be 102.8% of what it was during the trailing-twelve-month period. XOM's EV/EBITDA ratio is 4.4x and its EV/Revenue ratio is 0.8x. The company grew revenue 24.0% TTM over TTM. Exxon Mobil has net tangible assets of $155.6 billion and its total debt represents 24.3% of its EBITDA over the most recent fiscal year.

XOM has a higher EV/EBITDA ratio than COP, but it also has a lower debt level relative to its EBITDA. Exxon's 2.6% yield is lower than ConocoPhillips' 3.9%. Looking at the two companies balance sheets, it appears that a thorough evaluation of both companies would requiring diving into the composition of each company's long term investments and PP&E, that are responsible for large portions of both companies' net tangible assets. Without that understanding, it is difficult to determine which is a better investment opportunity.

Williams-Sonoma is a retailer with a market capitalization of $3.3 billion. It had TTM revenue of $3.6 billion, and has an expected annual yield of 2.0%. The company's expected annual dividend rate is expected to be 95.5% of what it was during the trailing-twelve-month period. WSM's EV/EBITDA ratio is 5.8x and its EV/Revenue ratio is 0.8x. The company grew revenue 8.6% TTM over TTM. The company has net tangible assets of $1.3 billion and its total debt represents 1.8% of its EBITDA over the most recent fiscal year. WSM appears less attractive than some of the retailers discussed later in this article, because its valuation multiples are higher and its net tangible assets lower relative to its market cap.

Microsoft is a computer software company with a market capitalization of $216.2 billion. It had TTM revenue of $69.9 billion, and has an expected annual yield of 2.4%. The company's expected annual dividend rate is expected to be 97.9% of what it was during the trailing-twelve-month period. Microsoft's EV/EBITDA ratio is 5.9x and its EV/Revenue ratio is 2.5x. It grew revenue 11.9% TTM over TTM. MSFT has net tangible assets of $43.8 billion and its total debt represents 39.8% of its EBITDA over the most recent fiscal year. Despite what would seem to be a moderate debt/EBITDA ratio, looking at Microsoft's balance sheet reveals that it actually has substantial net current assets. I am long MSFT because I believe the market is undervaluing it based on its recent performance. The company was profitable throughout the recession, despite the massive drop in IT spending, and has grown its revenue above its pre-downturn levels (its FY revenue through 6/2011 was actually ~15% higher than its revenue in the FY ending in 6/2008). Microsoft has a very strong balance sheet and a compelling 2.4% yield.

Lockheed Martin is a defense company with a market capitalization of $24.0 billion. It had TTM revenue of $46.4 billion, and has an expected annual yield of 4.2%. LMT's expected annual dividend rate is expected to be 105.0% of what it was during the trailing-twelve-month period. Lockheed Martin's EV/EBITDA ratio is 5.4x and its EV/Revenue ratio is 0.5x. The company grew revenue 4.0% TTM over TTM. The company has net tangible assets of -$6.3 billion and its total debt represents 98.9% of its EBITDA over the most recent fiscal year.

This company's balance sheet is unattractive, given its massive $6.3 billion of negative net tangible assets and the fact that its total debt is almost equal to its annual EBITDA. That fact might be less concerning if LMT were not a defense company at a time when two wars are being wound down and defense spending is likely to face significant pressure. Nevertheless, the company is expected to pay a higher dividend this year than over the twelve-month trailing period--expressive confidence at a time when it is likely to face pressure. Despite LMT's attractive 4.2% yield, the risk here is too high for my taste.

The Gap is a clothing retailer with a market capitalization of $8.6 billion. It had TTM revenue of $14.7 billion, and has an expected annual yield of 2.8%. GPS's expected annual dividend rate is expected to be 104.3% of what it was during the trailing-twelve-month period. The company's EV/EBITDA ratio is 3.4x and its EV/Revenue ratio is 0.5x. The Gap grew revenue 1.6% TTM over TTM and over the trailing-twelve-month period. The company has net tangible assets of $3.1 billion and its total debt represents 62.9% of its EBITDA over the most recent fiscal year. Even though retailers are facing a lot of pressure and valuations tend to be depressed, the Gap's 3.4x EV/EBITDA ratio and 2.8% yield look pretty attractive. The company has current assets greater than total liabilities and a pretty healthy balance sheet, in general. The Gap may make my retailer watch list, but I am holding off on pulling the trigger on this one.

Best Buy is an electronics retailer with a market capitalization of $9.0 billion. It had TTM revenue of $50.4 billion, and has an expected annual yield of 2.6%. The company's expected annual dividend rate is expected to be 105.3% of what it was during the trailing-twelve-month period. BBY's EV/EBITDA ratio is 3.2x and its EV/Revenue ratio is 0.2x. The company grew revenue 0.1% TTM over TTM. Best Buy has net tangible assets of $3.5 billion and its total debt represents 70.5% of its EBITDA over the most recent fiscal year. Electronics retail is a difficult segment in the current macroeconomic environment, and that is likely the reason for BBY's depressed valuation multiples. Among large cap retailers, BBY looks like it is worth watching, but I think there are more compelling opportunities elsewhere in the market.

American Eagle Outfitters is a clothing retailer with a market capitalization of $2.0 billion. It had TTM revenue of $3.0 billion, and has an expected annual yield of 4.2%. The company's expected annual dividend rate is expected to be 99.4% of what it was during the trailing-twelve-month period. The company's EV/EBITDA ratio is 3.5x and its EV/Revenue ratio is 0.5x. The company grew revenue -1.3% TTM over TTM. AEO has net tangible assets of $1.3 billion, and the company has no debt.

I have been long on AEO for a number of years. Its healthy 4+% dividend yield and strong balance sheet are compelling. With an EV/EBITDA ratio of just 3.5x, it looks like an attractive takeover target for a private equity firm. While teen clothing retailers' earnings can be volatile, because fashion changes quickly and sometimes unpredictably, AEO stock still seems cheap to me, given its history of profitability (including during the recession). While its recent bottom-line underperformance is troubling, it seems like the company still has the ability to recover.

*Data sourced from Screener.co.

Source: 11 Attractively Valued Dividend Plays With Low Debt And 1%+ Yields