The Best Dividend Paying Companies With Zero Debt
Nauman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Most investors prefer companies that pay dividends. But buying a stock just for its high-yielding dividend without studying the underlying fundamentals could be a risky bet. Solid cash reserve, high and sustainable growth forecast, and little or no debt all add credibility to a company's dividend. For this article, I've researched companies that have all of these qualities. Also, to make sure I find the best gems, all four companies mentioned in this article comply with the following criteria:
- Market Cap of more than $500 million and an average volume of at least 300K = Low Volatility = Low Beta
- Cash per share of at least $2.5 and Current Ratio greater than 1 = Good Liquidity = Dividend Sustainability
- Low or no debt = Current dividends that are from earnings and not from any other source
- PEG ratio of less than 1.5 = A fair trade-off between the cost and growth
- DCF valuation discount of at least 20% = Earnings translating into cash flow
- Dividend Yield of at least 2% = Obvious
Results
| Company | Symbol |
Market Cap ($billions) |
Dividend Yield % |
| The Men's Wearhouse | (NYSE: MW) | 1.4 | 2.6 |
| Guess |
(NYSE: GES) | 2.3 | 2.9 |
| American Eagle Outfitters | (NYSE: AEO) | 4.1 | 2.1 |
| True Religion Apparel | (NASDAQ: TRLG) | .66 | 3.1 |
The Men's Wearhouse
The company operates as a specialty apparel retailer in the United States and Canada.
Current valuation
It has $2.70 per share in cash, no debt at all, and a PEG ratio of 1.36. Stock trades at 11.2 times trailing earnings, compared to peer averages of 22.7 times, suggesting Men's Wearhouse is significantly undervalued when compared to its industry and competitors.
With an EBITDA margin in the low double-digits and an operating cash flow margin of around 7%, it has an impressive cash flow generation, and when I look at the enterprise value implied by the current stock price, it is only 4.5 times trailing EBITDA, much lower than the rest of the industry. Backed by strong free cash flow, it should be able to further increase its cash reserve by $1.5 per share next year. **
Discounted cash flow valuation
I'm comfortable with a long-term revenue growth outlook of low-to-mid single-digits on Men's Wearhouse. But since the company has little or no interest expense, it should be able to reduce the gap between EBITDA and operating cash flow margin by at least 20% through better management of the working capital. I expect the company to grow its free cash flow at a 2%-4% rate for the long term. Discounting that back, it suggests a fair value of about $41.
Guess
The company is primarily a clothing line brand sold by other retailers; it also markets other fashion accessories such as watches, jewelry and perfumes.
Current valuation
Guess has $3.46 per share in cash, almost no debt, and a PEG ratio of 1.34. Analysts expect $2.31 in EPS for the next fiscal year, and the current stock price is only 11 times that figure.
Impressively, it has similar margins on both EBITDA and operating cash flow in the mid-teens, and its enterprise value implied by the current stock price is only 5.5 times trailing EBITDA. With a free cash flow margin of around 10%, it should be able to further increase its cash reserve by $2.3 per share next year.**
No wonder the company issued special dividends of more than $3.5 per share in the last 3 years, in addition to its regular dividends. The share count has already fallen from 95 million in fiscal 2008 to 85 million at the end of 2012, and considering the management's plans on buybacks, this trend should continue.
Discounted cash flow valuation
I'm comfortable with a long-term revenue growth outlook of mid-single digits on Guess. I expect it to grow its free cash flow at a 3%-5% rate for the long term. Discounting that back, it suggests a fair value of about $35.
American Eagle Outfitters
The company operates as an apparel and accessories retailer in the United States and Canada.
Current valuation
Analysts expect $1.56 in EPS for the next fiscal year, and the current stock price is only 13.1 times that figure. It has an EBITDA margin in the mid-teens and operating cash flow margin of 10%. This has helped it in generating impressive levels of free cash flows in the recent years. The company's enterprise value implied by the current stock price is only 7.7 times trailing EBITDA.
The company has $2.75 per share in cash, no debt at all, and a PEG ratio of 1.09. Moreover, I expect it to further increase its cash reserve by $1.6 per share next year.** In addition to its regular dividends, the company also issued a special dividend of $1.61 per share last year.
Discounted cash flow valuation
I'm comfortable with a long-term revenue growth outlook of mid-to-high single-digits on American Eagle Outfitters. I expect it to grow its free cash flow at a 7%-9% rate for the long term. Discounting that back, it suggests a fair value of about $26.
True Religion Apparel
The company operates as a specialty apparel retailer worldwide.
Current valuation
It has more than $8 per share in cash! That will almost be one-third of the current stock price!. Plus it has no debt at all, and a PEG ratio of 0.96. Analysts expect $2.15 in EPS for the next fiscal year, and the current stock price is only 12.3 times that figure.
It has an impressive EBITDA margin in the low 20s and operating cash flow margin in the high-teens. But to see the real impact of holding almost one-third of the current stock price in cash, I looked at the implied enterprise value, which came out at only 5.25 times trailing EBITDA. Moreover, I expect it to further increase its cash reserve by almost $2 per share next year.** This will increase the company's total cash to $10 per share! Media reports suggest True Religion is conducting a sale process. If that doesn't go as planned it can issue a very big special dividend in the future.
Discounted cash flow valuation
I'm comfortable with a long-term revenue growth outlook of high single-digits on True Religion. It has a free cash flow margin of around 11%. When compared with its peers, True Religion is already exemplary in terms of free cash flow margin and I don't think the company has as much potential here anymore.
All told, I expect it to grow its free cash flow at a 6%-8% rate for the long term. Discounting that back, it suggests a fair value of about $36.
The Bottom Line
By creating a basket of fundamentally strong dividend stocks, investors can generate safe and stable income in a volatile market environment. With solid cash reserves and decent growth forecasts -- the aforesaid stocks offer investors a valuable source of regular income, as well as the potential for longer-term capital appreciation.
**(Before dividends and share buybacks)
Nauman Aly has no position in any stocks mentioned. The Motley Fool recommends Guess?. The Motley Fool owns shares of Guess?. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
