The payout ratio is the percentage of a company's earnings paid out to investors as cash dividends. The lower is the payout ratio, the more secure is the dividend because smaller dividends are easier to pay out than larger dividends.
I have searched for very profitable companies that pay rich dividends and have a low payout ratio, this kind of stock offers limited downside and provides a very nice income.
I have elaborated 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:
1. The stock is included in one of the following indexes: S&P 500, S&P 400 MidCap or S&P 600 SmallCap (American stocks).
2. Dividend yield is greater than 4.0%.
3. The payout ratio is less 0.55.
4. The forward P/E is less than 12.
5. The PEG ratio is less than 1.60.
I used Portfolio123's powerful free screener to perform the search. After running this screen on November 02, 2012, before the market open, I obtained as results the 6 following stocks:
CA Technologies (NASDAQ:CA)
CA Technologies provides enterprise information technology management software and solutions in the United States and internationally.
CA Technologies has a low debt (total debt to equity is only 0.24) and its price to free cash flow for the trailing 12 months is quite low at 13.07. The trailing P/E is very low at 11.70 and the forward P/E is even lower at 8.84 and the PEG ratio is also low at 1.25. The average annual earnings growth estimates for the next 5 years is 9.33%. The forward annual dividend yield is very high at 4.32% and the payout ratio is 0.51. The company is trading 16% below its 52-week high, and has 18% upside potential based on the consensus mean target price of $27.30. On October 26, CA Shares fell 8.7% as the company reported FY Q2 disappointing results and trimmed guidance. Nevertheless I think that CA stock is still attractive due to its low P/E and its high dividend yield.
GameStop Corp. (NYSE:GME)
GameStop Corp. operates as a video game retailer. It sells new and used video game hardware, physical and digital video game software and accessories.
GameStop Corp. has no debt at all and its price to free cash flow for the trailing 12 months is very low at 5.76. The trailing P/E is very low at 10.04 and the forward P/E is even lower at 6.88 and the PEG ratio is also low at 1.13. The price to sales is very low at 0.32 and the average annual earnings growth estimates for the next 5 years is 8.90%. The forward annual dividend yield is very high at 4.24% and the payout ratio is 0.43. There have been net insider purchases during the last six months of 17,190 shares. GME stock looks quite attractive.
Intel Corporation (NASDAQ:INTC)
Intel Corporation designs, manufactures, and sells integrated digital technology platforms primarily in the Asia-Pacific, the Americas, Europe, and Japan.
Intel has a very low debt (total debt to equity is only 0.15) and the trailing P/E is very low at 9.72 and the forward P/E is also very at 11.30. The PEG ratio is very low at 0.92 and the average annual earnings growth estimates for the next 5 years is 10.61%. The forward annual dividend yield is very high at 4.04% and the payout ratio is only 0.39. Intel is not anymore the fast-growing company it used to be, but with such a low P/E and such a high dividend yield the INTC stock is a safe bet.
Lockheed Martin Corporation (NYSE:LMT)
Lockheed Martin is a global security and aerospace company.
Lockheed Martin has a very low trailing P/E of 10.75 and a very low forward P/E of 11.46. The price to sales ratio is very low at 0.64 and the PEG ratio is 1.51. The forward annual dividend yield is very high at 4.88% and the payout ratio is 0.53. Lockheed Martin paid cash dividends of $326 million in the third quarter and $979 million during the year-to-date period. The company bought back 3.3 million shares at a cost of $294 million in the third quarter and 8.2 million shares at a cost of $722 million during the year-to-date period. All these factors make the stock quite attractive.
Seagate Technology (NASDAQ:STX)
Seagate Technology designs, manufactures, markets, and sells hard disk drives for enterprise storage, client compute, and client non-compute market applications worldwide.
Seagate has an extremely low trailing P/E of 4.38 and an extremely low forward P/E of 4.41 and the PEG ratio is also very low at 0.52. The price to free cash flow for the trailing 12 months is very low at 4.91 and the price to sales is also very low at 0.74. The forward annual dividend yield is very high at 4.53% and the payout ratio is very low at 0.20. On October 31, Seagate reported its fiscal first Quarter 2013 financial results which were below estimates and the Non-GAAP gross margin was 29%, about a point below guidance. In the quarter, Seagate bought back 20.5 million shares for about $669 million. Although the results were disappointing, I think that a company which has 42% of the world's disk drives market share and is selling with such low multiples is a good investment.
Safeway Inc. (NYSE:SWY)
Safeway Inc., together with its subsidiaries, operates as a food and drug retailer in North America.
Safeway has a very low trailing P/E of 8.76 and even a lower forward P/E of 7.89. The price to sales ratio is very low at 0.09 and the PEG ratio is very low at 0.93. The average annual earnings growth estimates for the next 5 years is 9.39%. The forward annual dividend yield is very high at 4.23% and the payout ratio is quite low at 0.37. Safeway's stock has shown recent upside momentum; the price crossed-over its 50 days simple moving average four days ago and the 10 days moving average crossed-over its 20 days simple moving average also four days ago. All these factors make the stock quite attractive.
Disclosure: I am long INTC, STX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.