October 5, 2012
Written By Chloe Lutts Jensen
One of the benefits of being an income investor is that focusing on dividend-paying stocks automatically screens out companies without any revenues.
Speculative starts ups, biotechs and other hopefulls simply don’t have the cash to dole out to their investors. Dividends essentially act as a litmus test of a company’s viability.
But even income investors should look beyond a company’s dividend payout.
One important metric is a company’s payout ratio: what percentage of its cash is it distributing to investors?
Another relevant piece of information is the company’s cash flow. In addition to maintaining or increasing dividends, companies with high and growing cash flow can make acquisitions, increase capital spending or R&D, reduce debt and buy back shares.
Today I have two dividend-paying stock recommendations for you, both with excellent and improving cashing flow.
My first recommendation is from The Complete Investor via the latest Dividend Digest.
“Cash flow standout URS Corp. (URS: yield 2.20%), already an Income/Value pick, also joins Growth Portfolio this issue. It hasn’t been getting the credit it deserves, but this will change.
“This $10 billion engineering and construction firm has been on a growth track despite headwinds coming at it from almost every direction. The U.S. government, a major customer, has been tightening its purse strings, while the weak global economy has forced most other countries to cut back on infrastructure projects as well. Yet profits in 2012 will likely be at least 50% higher than 2008 levels, as the company has compensated for slower revenue growth by boosting internal productivity and profit margins.
“URS is also expanding its presence in the energy arena. Its recent purchase of Flint Energy Services marks a significant shift in the relative importance of its business segments. Flint is a major player in the Canadian tar sands, where growth will likely exceed the low teens through at least the decade’s end.
“[URS] trades at about a 25% discount to book value. Since 2008 the company has repurchased roughly 10% of its shares, and recently it initiated its first-ever dividend. The Flint all-cash purchase did increase long-term debt, but while this means some free cash flow over the next few years may be used to pay the debt down, this by no means excludes dividend increases or even additional acquisitions.”—Stephen Leeb, PhD., The Complete Investor, September 2012
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My second idea today also has excellent free cash flow and a yield of about 4%. This recommendation is from Cabot Benjamin Graham Value Letter via the latest Dividend Digest.
“Ingles Markets, Inc. (IMKTA: yield 4.00%) is a leading supermarket chain with operations in six southeastern states. … Ingles opened a newly built distribution and warehouse center in Asheville to replace its outdated (and only) facility. The new center will increase efficiency and add to profitability. The company is expanding its selection of private label items under the Laura Lynn name. Private label goods are noticeably more profitable.
“The company is enjoying a surge in demand from consumers who are opting to buy groceries and cook at home rather than spend extra money to dine at restaurants. The transition to the new distribution facility and higher food costs will hold back earnings growth in 2012, but I expect 5% sales and 10% EPS growth during the next 12 months.
“Cash flow of more than $5.00 per share is more than enough to expand Ingles’ store count, and at the same time, pay down its high debt load and reduce interest expense. The price-to-earnings ratio is a tad high at 9.4 times current EPS, but the 4% dividend yield and price to book value ratio (P/BV) of 0.88 make IMKTA a very attractive investment opportunity.
My Maximum Buy Price for IMKTA is 16.16, and my Minimum Sell Price is 23.60.”—J. Royden Ward, Cabot Benjamin Graham Value Letter, September 2012
Wishing you success in your investing and beyond,
Editor of Investment of the Week
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