When investing in dividend growth stocks, the goal is to find and buy stocks that will continue to raise their dividends. To do so, the business must generate cash in excess of their operating needs. But too many times this is simply not enough. Many companies generate significant free cash flow, but often that cash is already spoken for in the form of debt obligations.
Prior to the most recent downturn many companies took on enormous levels of debt, usually for one of these two reasons:
I. Fund An Acquisition
Debt has been relatively cheap for some time and easy to access. When sellers thought the buyers stock was overpriced, they would demand significant levels of cash to close the deal. Debt was often used to raise the cash.
Analysts that follow companies have a target debt to total capital they are looking for. If they consider it is too low, management is encouraged to issue debt and use the proceeds to purchase their stock. (As an aside, before the 2008/2009 downturn some issued debt and purchased their stock close to its high. Then when the economy turned down they had to raise operating cash by, you guessed it, issuing stock well below where they purchased it.)
Having low levels of debt provides companies with greater financial flexibility. To gauge how levered a company is, the metric I like to look at is debt to total capital. Debt includes both long-term and short-term debt and is readily available on the liabilities side of the balance sheet. Total capital is a combination of debt and shareholders equity. When you divide debt by total capital a desirable rate is something less than 35%, but I will consider rates up to 50% on a short-term basis.
This week week, I screened my dividend growth stocks database for stocks with:
- Debt to total capital less than 35%
- Positive FCF Payout of 60% or lower
- Market Cap. greater than $2 billion
- Dividend yield of 3% or higher
The results are presented below:
Intel Corporation (INTC) is the world's largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products.
Yield: 3.0%: | Debt/Cap: 13.8% | FCF Payout: 42.4%
Aflac Incorporated (AFL) provides supplemental health and life insurance in the U.S. and Japan. Products are marketed at work sites and help fill gaps in primary insurance coverage. Approximately 80% of earnings comes from Japan and 20% from the U.S.
Yield: 3.1%: | Debt/Cap: 19.6% | FCF Payout: 5.7%
Genuine Parts Co. (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.
Yield: 3.1%: | Debt/Cap: 14.7% | FCF Payout: 58.3%
Procter & Gamble Company (PG) is a leading consumer products company the markets household and personal care products in more than 180 countries.
Yield: 3.2%: | Debt/Cap: 34.0% | FCF Payout: 57.7%
Emerson Electric Co. (EMR) designs and supplies product technology, and delivers engineering services and solutions to a wide range of industrial, commercial, and consumer markets around the world.
Yield: 3.2%: | Debt/Cap: 33.0% | FCF Payout: 46.1%
Chevron Corporation (CVX) is a global integrated oil company (formerly ChevronTexaco) with interests in exploration, production, refining and marketing, and petrochemicals.
Yield: 3.2%: | Debt/Cap: 7.3% | FCF Payout: 41.6%
Cullen/Frost Bankers, Inc. (CFR) , is one of the largest multi-bank holding companies headquartered in Texas, has more than 110 offices in various cities in the state.
Yield: 3.3%: | Debt/Cap: 29.3% | FCF Payout: 45.3%
Harris Corporation (HRS) focuses on communications equipment for voice, data and video applications for commercial and governmental customers.
Yield: 3.0%: | Debt/Cap: 13.9% | FCF Payout: 43.5%
ConocoPhillips Co. (COP) is a leading integrated oil company. It plans to spin off its downstream operations as a new publicly traded company, Phillips 66.
Yield: 3.6%: | Debt/Cap: 25.6% | FCF Payout: 31.3%
Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer products industries.
Yield: 3.6%: | Debt/Cap: 25.6% | FCF Payout: 48.8%
Magellan Midstream Partners LP
Magellan Midstream Partners LP (MMP) is engaged in the transportation, storage and distribution of refined petroleum products primarily through its 9,600-mile pipeline system.
Yield: 4.6%: | Debt/Cap: 31.8% | FCF Payout: 59.0%
As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor dividend fundamentals. However some of the others may be worth additional due diligence.
My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 210+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have had a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.