Fast-growing companies usually do not pay dividends because they need to reinvest all the cash they generate back into the business. But it is still possible to find companies with above average growth prospects that do pay dividends.
I have searched for very profitable companies with above average growth prospects that pay dividends and technically are showing positive momentum. Those stocks have a better than average chance of beating the market.
I have prsented a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research.
The screen's formula requires all stocks to comply with all following demands:
- The stock is included in the Russell 3000 index. Russell Investment explanation: "The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected."
- Earnings growth estimates for the next 5 years (per annum) is greater than 11%.
- Price to free cash flow is less than 15, (many investors prefer using free cash flow instead of net income to measure a company's financial performance, because free cash flow is more difficult to manipulate. Free cash flow is the operating cash flow minus capital expenditure).
- The PEG ratio is less than 1.1.
- Dividend yield is greater than 1.7%
- 10-day moving average is above 20-day moving average, and the crossover happened 2 days or less prior to the start of the screen (Short term momentum indicator).
After running this screen on October 13, 2012, I obtained the 4 following stocks:
|Company||Symbol||Last price||Market Cap ($millions)||Trailing P/E||Forward P/E||PEG Ratio|
|Interactive Brokers Group, Inc.||IBKR||14.15||645||11.99||11.23||1.09|
|Everest Re Group Ltd.||RE||109.24||5,660||9.35||8.10||0.80|
|United Online, Inc.||UNTD||5.58||506||11.62||20.67||0.77|
AAR Corp. (AIR)
AAR CORP. provides products and services to aviation, government, and defense markets worldwide.
AAR CORP. has a very low forward P/E of 8.46 and a very low PEG ratio of 0.82. The average annual earnings growth estimates for the next 5 years is 12.72%. The price to free cash flow for the trailing 12 months is very low at 8.18 and the price to sales is also very low at 0.31. The company pays a dividend, and the forward annual dividend yield is 1.82%. During the fiscal first quarter of 2013, the company purchased 475,000 of its shares on the open market under its share repurchase program for $6.1 million (average acquisition price of $12.84 per share) and declared and paid dividends of $3.0 million. The Company also repurchased $13 million face value of its convertible bonds at an effective yield to maturity of 4%. The convertible bond repurchases reduced the fully diluted share count by 258,000 shares in the first quarter. All these factors make the stock quite attractive.
Interactive Brokers Group, Inc. (IBKR)
Interactive Brokers Group, Inc. operates as an automated electronic broker and market maker. It engages in routing orders; and executing and processing trades in securities, futures, foreign exchange instruments, bonds, and mutual funds on approximately 100 electronic exchanges and trading venues worldwide.
Interactive Brokers has a low forward P/E of 11.23 and a low PEG ratio of 1.09. The average annual earnings growth estimates for the next 5 years is 11%. The price to free cash flow for the trailing 12 months is very low at 0.56 and the price to sales is also very low 0.48. The company has almost no debt at all (total debt to equity is only 0.02). Interactive Brokers pays a dividend, and the forward annual dividend yield is quite high at 2.83%. The IBKR stock seems to be a good investment right now.
Everest Re Group Ltd. (RE)
Everest Re Group, Ltd., together with its subsidiaries, underwrites reinsurance and insurance in the United States (U.S.), Bermuda, and international markets.
Everest Re Group has a very low forward P/E of 8.10 and a very low PEG ratio of 0.80. The average annual earnings growth estimates for the next 5 years is 11.67%. The price to free cash flow for the trailing 12 months is quite low at 10.83 and the price to sales is also low at 1.19. The company has a very low debt (total debt to equity is only 0.13). Everest Re pays a dividend, and the forward annual dividend yield is 1.76%. All these factors make the stock quite attractive.
United Online, Inc. (UNTD)
United Online, Inc., through its subsidiaries, provides consumer products and services over the Internet in the United States, Europe, and internationally.
United Online has a very low PEG ratio of 0.77. The average annual earnings growth estimates for the next 5 years is 15%. The price to free cash flow for the trailing 12 months is 14.53 and the price to sales is very low at 0.58. The company pays a dividend, and the forward annual dividend yield is very high at 7.17%. During the second quarter of 2012, the Memory Lane subsidiary completed the acquisition of schoolFeed, Inc., the developer of a leading Facebook app that enables online high school networking. The company explained that this acquisition is expected to enrich the Classmates business domestically and its StayFriends business internationally by providing the opportunity for its members to reconnect and interact with significantly more of their high school friends and acquaintances. All these factors make the stock quite attractive.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in IBKR over the next 72 hours.