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Stock Screen: Debt-Free Dividend Payers - April 4, 2012
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 declining.
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 organizations, we used the online screening tools of The Value Line Investment Survey to cull out companies, such as Apple Inc. (AAPL) and Weis Markets (WMK), that have no long-term debt, pay dividends, and have good overall investment merit. 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.
Apple is the world’s largest designer of computers and consumer electronics. Its list of iconic product lines includes the MacBook laptop, iPod digital music player, the iPad tablet, and the iPhone smartphone. These devices are primarily used in the business, creative, education, government, and consumer markets. Furthermore, it sells operating systems, utilities, languages, developer tools, and database software. With a current market cap of $583 billion, Apple is the largest company in the world by a significant margin.
Apple continues to generate stellar results. In fact, recent comparisons have only added to the bullish case for this top-notch technology stock. Share net climbed markedly during the first quarter of fiscal 2012, which ends September 29th, as consumers flocked to the company’s latest smartphone offering the iPhone 4S. iPad 2 sales were also quite strong, despite concerns that demand for the tablet would wane as more Android-powered products hit the market and Amazon (AMZN) rolled out its Kindle Fire reader. What’s more, gross profits were better than we expected, thanks to elevated operating leverage, stable selling prices, favorable component pricing, and a mix shift toward higher-margined smartphone offerings.
We look for the good times to continue through the rest of the current fiscal year and into fiscal 2013. Apple is rumored to be launching its latest iPhone in new countries (most notably China), which should help shore up results. What’s more, we look for it to continue to penetrate the large enterprise market, and gain traction in the traditional computing space via its Mac line. In fact, demand for MacBook Air and Pro laptops has been particularly strong in recent times. Healthy sales of the new iPad, which was released in mid-March, should also boost results in the coming quarters and enable the company to maintain its dominance in the tablet market.
After years of encouragement from the investment community, Apple has finally decided to return some of its near-$100 million cash hoard to its stockholders. It will commence payment of a $2.65-a-share dividend in the September 2012 quarter. The board also authorized the repurchase of up to $10 billion of its stock over a 3-year horizon beginning in fiscal 2013. That said, given its debt-free balance sheet, it should still have ample cash for R&D and acquisitions going forward.
Weis Markets operates 164 retail food markets, including both superstores and conventional stores. The company’s supermarkets are located in Pennsylvania, Maryland, New York, New Jersey, and West Virginia. The average store size is about 48,000 square feet. Weis sells 2,000 items under its own trademarks, along with other national brand-name merchandise. The company owns about one half of its sites outright.
Weis’ top line has been climbing at a solid clip recently. Last year’s growth was fueled by increased revenues at existing locations, unlike the prior two years, when results were bolstered by the 2009 acquisition of a small chain in Binghamton, New York. Comparable-store sales advanced nicely as the year progressed, rising to a mid-single-digit clip toward the end of the year. Higher prices drove most of the increase, as the company passed along inflationary cost increases to its customers. That said, the already thin gross margin has narrowed a bit over the last year, suggesting that Weis is being cautious in implementing price increases, to avoid cost-conscious consumers defecting to competitors.
We also look for the company to continue to boost capital spending, which we believe is imperative in this highly competitive industry. The company’s debt-free balance sheet is certainly a plus, and gives it good financial flexibility. In fact, Weis recently paid out a special dividend, with its stockholders receiving $1.00 a share in late November of last year. What’s more, the board of directors raised its quarterly dividend by 3.4%, to an annual rate of $1.20 a share. This represents the first increase since 2006. Although the company had to probably dip into its cash hoard to pay the dividend, we believe increased operating cash flow per share will be sufficient to meet its working capital needs.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.