High Return, Strong Dividend History and Cheaply Valued

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As an income investor, I always want to invest in a company, which has a history of paying consistent and sustainable dividends. Whether the dividend is sustainable or not depends on the business operation itself. The company needs to be profitable, generating a high return on capital, and employing reasonable debts. Thus, a screen is set up to find those situations with the following 6 main criteria: (1) market cap is larger than $10 billion; (2) return on invested capital is more than 20%, (3) minimum 10 year dividend payments,  (4) dividend yield is at least 1%, (5) debt to equity is maximum 0.5x, and (6) EV/EBITDA is less than 10x. Here are the top 3 results:

TJX Companies (NYSE: TJX) is the apparel and home fashions off-price retailer, offering merchandise at a 20%-60% discount compared to department and specialty stores’ prices in more than 2,900 stores. The majority of its sales were derived from the US, accounting for 76% of total sales in fiscal 2012. Clothing including footwear is the major revenue driver, accounting for 60% of total sales. In the last 10 years, TJX is well known for its consistent double-digit return on invested capital. Trailing twelve months, its ROIC is as high as nearly 43.3%. In the same period, it has paid out modest dividends. It has paid out 26.7% of its earnings into dividends over the last 12 months. The current dividend yield is 1.2%. TJX has a conservative capital structure, with debt of only 20% of its equity. The stock is trading at $43.48 per share, with a total market capitalization of $31.67 billion. The market is valuing the company at a 9.04x EV/EBITDA.

McGraw-Hill Companies (NYSE: MHFI) is another great example of double-digit returns and consistent dividend payments over the last 10 years. McGraw-Hill is the leader in the global information services industry with a diversified range of products in four operating segments including Standard & Poor’s, McGraw-Hill Financial, McGraw-Hill Information & Media, and McGraw-Hill Education. Since 2002, the company has delivered consistent double-digit returns on invested capital, in the range of 20.4% to nearly 37%. Trailing twelve months, its ROIC was 25.53%. In the same period, it has kept raising the dividend payment to shareholders, from $0.51 per share in 2002 to $1 per share in 2011, with the current dividend yield of 1.9%. The debt/equity ratio is quite decent at 0.4x. McGraw-Hill is trading at $54.48 per share, with the total market capitalization of $15.12 billion. The market is valuing the company at a 8.4x EV/EBITDA.

Rockwell Automation (NYSE: ROK) is the global supplier of automation power, control and information solutions to industrial businesses, with the similar division of sales to US customers (49%) and to non-US customers (51%), and the majority of its global sales via independent distributors. Over the trailing twelve months, the business generated a 25.75% return on invested capital. Indeed, a double-digit return on invested capital has been generated in 9 out of the last 10 years, except in fiscal 2009 when its ROIC was nearly 9%. The dividend payment has been continuous at least for the last 10 years, with the current dividend yield of 2.1%. It also employed a conservative capital structure, with D/E of 0.5x. Rockwell is trading at $84.26 per share, with the total market capitalization of $11.74 billion. The market is valuing the company at a 9.94x EV/EBITDA.

Foolish Takeaway

With a strong balance sheets, conservative capital structures, long history of consistent dividend payments, high returns on invested capital and cheaply valued shares in the market, those large cap stocks are worth considering for the income portion of your portfolio. 

 

 

 


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of The McGraw-Hill Companies. 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!

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