A lot of income investors often target the dividend yield as the primary benchmark for choosing stocks to invest in. When a certain business generates cash flow, it can use cash flow to either reinvest into the business to keep its competitive advantage and to grow, or to strengthen the financial structure to further benefit its shareholders, including paying down debt and buying back shares. But reasonably, a $1 reinvestment cannot turn into $1 earnings; the company should pay it out to shareholders. However, dividends might be manipulated in their appearance so that even if the business performance deteriorates, investors still feel confident just by looking at its consistent payment, and the stock price is kept inflated at a high price. In the case management decides to use the existing cash to pay out the dividends, the business which should be reinvested in further deteriorates.
Investors should seek out companies paying high dividends, with good profits and cash flows and ample valuation. I run the screen with four main criteria: dividend yield of at least 7%, D/E at most 50%, cash flow from operations greater than zero and P/E ratio in the range of positive 0-12. With this screen, I excluded several sectors such as financial services and real estate. Here are the top four candidates which catch my eye:
Star Bulk Carrier (NASDAQ:SBLK), provides worldwide transportation of dry bulk commodities through its vessel-owning subsidiaries for a range of customers of major and minor bulk cargoes including iron ore, coal, grain, cement and fertilizer. At the end of fiscal year 2010, the company owned and operated a fleet of 13 vessels with an average age of 10.6 years and combined cargo carrying capacity of around more than 1.2 million DWT. The company paid 20 cents annually on the current price of $0.95 per share, making the dividend yield 21%. The market capitalization is more than $60 million in market capitalization, the D/E is at 44% and the TTM operating cash flow topped $72 million. Currently it is trading at 3x earnings, 10% of book value and only 0.9x the cash flow.
Knightsbridge Tankers (VLCCF) is an international seaborne transportation of crude oil and dry bulk cargoes. As of the end of December 2010, the company’s fleet consists of four double-hull very large crude carrier oil tankers, and current capacity is up to 1.53 DWT. In the year 2011, it paid out $2 in dividends along with the current stock price of $14.65, making the dividend yield 13.7%. The market capitalization stays at nearly $360 million, the D/E is at 41% with $151 million in total long-term debt, $50 million in cash and the TTM operating cash flow is around $45 million. Right now, VLCCF is trading at the net asset values, at 9.1x earnings, and only 6.2x cash flows.
Lincoln Educational Services Corporation (NASDAQ:LINC) is the provider of career oriented post-secondary education. At the end of 2010, it operated 45 campuses in 17 states in the U.S. The courses offered include diploma programs in five areas of study such as health sciences, automotive technology, skilled trades, business and information technology, and hospitality services. In 2011, it paid out 82 cents in dividends, on the share price of nearly $7.8 per share, making the yield 10.5%. On its balance sheet, the D/E is only 15%, employing very little debt, whereas the cash position is at $26 million, making 7.3% of the total assets. In the trailing 12 months, it generated $74 million in cash flow. The market capitalization is $176.3 million, with 5x P/E, 30% off the book value, and 2.4x the operating cash flow.
Highway Holdings (NASDAQ:HIHO) is an integrated manufacturer of metal, plastic, electric and electronic components, subassemblies and finished products for Japanese, German and U.S. OEMs and contract manufacturers. It has two business segments: the metal stampings and mechanical OEM and electric OEM. The company is based in Hong Kong. In the year 2011, it paid out 28 cents in dividends on the price of $2.18 per share, making the dividend yield 12.8%. It has a very conservative balance sheet, with D/E at only 2%. The equity is at $12 million, whereas the company has $6 million in cash and nearly no debt at all. The market capitalization is $8.24 million, so actually the whole business is now trading only $2.24 million, and it is generating $2 million yearly in operating cash flow. With the current market capitalization, it is trading at 6.8x earnings, 0.7x book value and 4.1x the level of cash flow.
Investors should look carefully in each situation to determine the safety and soundness of the business so that it can be able to generate sufficient earnings and cash flows in the future to keep paying the sustainable dividends.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk
- High Yield Dividend Stocks in Gurus' Portfolio
- Top dividend stocks of Warren Buffett
- Top dividend stocks of George Soros