For the low-risk investor, debt is a critical component of the portfolio. We present our best picks that come with low debt loads for a safer portfolio:
Buckeye Technologies Inc. (BKI) manufactures specialty cellulose materials and fibers, in the form of chemical, custom fiber, pulp and non-woven material. The cellulose itself is sourced from either wood or cotton, as the company has abilities in both wet-laid and air-laid technology for manufacturing cellulose. Unlike companies such as Rayonier (RYN), the company has far lower debt at 16% to equity, compared to 44% to equity for RYN.
The stock last traded at $25.77, rising nearly continually since 2009, currently hovering around the 50- and 200-days moving averages. The stock comes with a price-earnings tag of 8 times, with a healthy dividend yield of 0.9%. Earnings have grown consistently for the last 5 years with a rate of over 125%, revenues have shown a healthy growth all throughout 2011, and the net profit margin is nearly double the industry average at 13.73%.
Jabil Circuit Inc (JBL) is one of the best-known brands in audio equipment, although few may know it runs a host of businesses including electronic circuit design, industrial and mechanical design and similar services. Its clients are spread across the world, as are its operations, which are hosted in at least 20 countries. The stock offers a remarkably low debt ratio of only 60% compared to competitors such as Flextronics (FLEX), which has a nearly 100% debt to equity ratio, or Sanmina SCI Corp, with over 166%.
The stock offers excellent returns with a 19% dividend payout ratio and a return on equity far better than average at nearly 19%, compared to 2.8% for the industry. The liquidity position seems less than adequate with less than 1.0 for the quick ratio, but the interest coverage is on par for the industry.
Sauer-Danfoss Inc (SHS) is a mobile equipment manufacturer. The company makes various hydraulic, electronic, electrical and mechanical components that go into making a vehicle move. As an industrial equipment company, the competition is stiff, with Bosch and Eaton also in the neighborhood. But SHS stands tall with industry-leading returns at nearly 30%., compared to 6.5% for the industry. The return on equity is a whopping 102%, compared to only around 10.5% for the industry.
The company is relatively unknown, a fact that does not hurt when one looks at the price-earnings multiple of only five times, compared to 15 times for the industry average, with less than 50% debt to equity in the background. Bear in mind that earnings have more than doubled for the most recent quarter, ahead of top-line revenues that jumped 30% on a year-on-year basis.
Morningstar (MORN) is one of the world’s most well-known brands for information on mutual funds, hedge funds, ETFs and more, but that’s not all: The company is also a provider of investment management services, a segment that accounts for about a quarter of the company’s revenues. With just under $3 billion in market capitalization, the company is much smaller in size than competitors such as Thomson Reuters (TRI) and has returns well ahead of the industry averages, with 5-year average returns on equity nearly 10 times the industry.
The stock is trading at $57.26, in a 52-week range of $39.85 - $64.00, and tends not to attract the highest trading volumes. The liquidity is solid with a 2.35 times current ratio, and basically no long-term debt. Against its peers, Morningstar has gained substantial market share and reputation in the corporate finance space. Although the forward price-earnings ratio is not as high as the trailing multiple, the stock should be an excellent long-term bet for the low-risk investor.
Fastenal Inc (FAST) is a retailer and wholesaler of construction materials such as fasteners, nuts, bolts, paint and a host of other materials required in construction work. Its stores are branded under the name Fastenal and are located in in-plant as well as retail locations. The company has sales across the world in North America as well as Singapore, China and Malaysia, in addition to European locations. The stock last traded at $33.59, with a 52-week range of $36.80 to $25.36.
With no long-term debt, the company is in excellent shape, with over 5 times current ratio and industry exceeding gross, operation and net margins at 52%, 20% and 12% respectively. With excellent liquidity, the stock is somewhat expensive at 30 times its earnings, but the investor is looking at gaining the benefit of 22% and 35% increases in revenues and earnings, respectively, for the most recent quarter on a year-on-year basis.