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Stock Screen: Debt Free Dividend Payers - September 16, 2011
A debt free balance sheet is an impressive statement of financial strength. Although leverage has certain benefits and is, in fact, advisable and appropriate for some industries, operating without debt materially increases a company’s financial flexibility. For example, in lean times, such as a recession, a debt free balance sheet can allow a company to continue operations without interruption. This is a margin of safety that a highly leveraged company may not have.
Investors using dividend income to pay living expenses should find such stocks of particular interest. Indeed, if a company, industry, or the entire economy should fall on hard times, a debt-free balance sheet increases the chances that a company will maintain its dividend payments unaltered. Thus, an investor’s “paycheck” won’t take a hit at the same time that the value of his or her portfolio is taking a hit.
Indeed, such dividend payments can allow the investor to ride out the bad times and the likely corresponding share price decline. Although capital preservation is clearly important, sometimes the best way to preserve capital is to sit tight with a good company regardless of what the emotionally driven stock market is doing. Dividend distributions supported by a strong financial structure should make that easier to do.
To find such companies, we used the online screening tools of The Value Line Investment Survey to cull out companies, such as Buckle, Inc. (BKE), Healthcare Services Group (HCSG), and National Presto Industries, Inc. (NPK) that have no long-term debt and that pay dividends. Clearly, the screen could be altered to meet the needs of investors looking for a particular level of dividend payments or made more lenient for those who believe a little bit of debt is a good thing.
Buckle, Inc. is a retailer of medium- to high-priced casual apparel for fashion-conscious young men and women aged 15 to 30. The company operates 425 stores in 41 states mainly in the central, northwestern, and southern regions of the U.S., under the names ‘‘Buckle’’ and ‘‘The Buckle.’’ The merchandise mix includes denims, casual tops, sweaters, slacks, outerwear, accessories, and shoes.
The company has become well known for returning money to shareholders in recent years. Indeed, the payout ratio has hovered around 30% for the trailing five years. That figure rises significantly when we account for BKE’s special dividends. These distributions have seemingly become commonplace at the end of the year, with the 2010 special dividend totaling an impressive $2.50 per share. Encouragingly, the balance sheet is in just as good, if not better, condition now compared to last year. There is still no debt to be accounted for, and cash on hand is up 12% in the past year.
The stock has hit some resistance from Wall Street, and analyst Jerome Kaplan believes that now may be a good time for income seeking investors to hop onboard. The company has not been hurt by the recent economic uncertainty as badly as some in the retail space, and June-quarter sales suggest that trends may well remain healthy in the second half of 2011. Either way, financial flexibility ought to make for healthy capital deployments going forward.
Healthcare Services Group, Inc.
Healthcare Services Group provides housekeeping, laundry, linen, facility maintenance, and food services to the healthcare industry, primarily in the United States. Its housekeeping services consist primarily of cleaning, disinfecting, and sanitizing patient rooms and common areas of a client’s facility, as well as the laundering and processing of personal clothing belonging to patients.
Income-minded investors have been cleaning up here of late. The stock’s yield currently exceeds 4% and has done so for most of the last two years. This is almost double that of the average yield-bearing stock included in our Survey. Management has paid strict attention to this equity’s income component, and analyst Robert Greene, CFA does not envision much changing anytime soon. Although the most recent dividend hikes have not been much to write home about, HCSG actually made increases while many other companies kept with the status quo, or even made concessions. Plus, modest capital requirements and what seems to be an aversion to the acquisition game, augur well for future dividend increases.
National Presto Industries, Inc.
National Presto operates three businesses: Housewares/Small Appliances (33% of 2010 sales) designs, markets, and distributes pressure cookers and canners, skillets, griddles, woks, deep fryers, waffle makers, pizza ovens, coffeemakers, etc.; Defense Products (50%) produces precision and electromechanical assemblies, medium caliber cartridge cases, etc; Absorbent Products (17%) manufactures and sells private-label diapers and adult-incontinence products.
The company sits near the top of the list for debt-free dividend producers, currently offering a yield stretching above 9%. The stock’s performance over the trailing three months has mirrored that of the S&P 500 Index, which is not surprising considering its beta of .95. Although higher raw material and shipping costs continued to weigh on operating profits during the second quarter, we expect some of these pressures to abate in the second half, which should help to widen the operating margin. Further, the cash coffers are overflowing and capital expenditures are minimal versus cash flow. That being said, shareholder value will undoubtedly remain a priority.
At the time of this article's writing, the author did not have positions in any of the companies mentioned