I currently track over 220 dividend growth stocks in my D4L-Database and have determined some of the lower-rated stocks could be buys if the companies simply chose to increase their dividends. For various reasons their management has elected keep a low payout ratio and deploy the excess cash elsewhere.
To identify the companies with ample room to increase their dividend payout, I used the following criteria:
- A Free Cash Flow Dividend Payout (FCFp) of 40% or less. This means that 60% of the company's cash, after operating expenses, is going elsewhere.
- A sum of Debt to Total Capital (Debt) + FCFp of less than 50%. This should help weed out the companies holding the cash to pay interest.
- Trailing 12-month Free Cash Flow per share is greater than an average of the last 3 years. This weeds out companies where cash flow is decreasing.
- Cash on the balance sheet in excess of short-term debt. This weeds out companies that may have an immediate debt-servicing need for the cash.
- Yield greater than 2.5%.
Aflac Incorporated (NYSE:AFL) provides supplemental health and life insurance in Japan (80% of earnings) and the U.S. products are marketed at work sites and help fill gaps in primary coverage.
- FCF Payout: 4.5%
- Debt + FCFp: 25.1%
- Cash/ST Debt: n/a (no ST debt)
BancFirst Corp. (NASDAQ:BANF) owns and operates BancFirst, which provides a range of retail and commercial banking services in Oklahoma.
- FCF Payout: 37.5%
- Debt + FCFp: 45.6%
- Cash/ST Debt: 342 Times
Erie Indemnity Co. (NASDAQ:ERIE) is a management services company that provides sales, underwriting and policy issuance services to the policyholders of Erie Insurance Exchange in the U.S.
- FCF Payout: 7.9%
- Debt + FCFp: 7.9%
- Cash/ST Debt: n/a (no debt)
General Dynamics (NYSE:GD) is the world's fifth-largest military contractor and also one of the world's biggest makers of corporate jets.
- FCF Payout: 25.0%
- Debt + FCFp: 47.3%
- Cash/ST Debt: 2.9 Times
Microsoft (NASDAQ:MSFT), the world's largest software company, develops PC software, including the Windows operating system and the Office application suite.
- FCF Payout: 26.4%
- Debt + FCFp: 40.3%
- Cash/ST Debt: 29.8 Times
Nacco Industries Inc. (NYSE:NC) conducts business in the areas of lift trucks, housewares and mining in the Americas, Europe and the Asia-Pacific.
- FCF Payout: 15.4%
- Debt + FCFp: 48.7%
- Cash/ST Debt: 1.6 Times
Owens & Minor Inc. (NYSE:OMI) is a leading domestic distributor of medical and surgical supplies to the acute care market, a health care supply chain management company, and a direct-to-consumer (DTC) supplier of testing and monitoring supplies for diabetes.
- FCF Payout: 24.7%
- Debt + FCFp: 43.0%
- Cash/ST Debt: n/a (no ST debt)
You could view this from a positive perspective and say the above dividends should be very safe and the companies are in an excellent position to continue to raising them each year. In dividend investing, cash is king, but at some point management has to be willing to share it with the company's owners.
Full Disclosure: Long AFL, GD, MSFT, OMI. See a list of all my dividend growth holdings here.
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- Warning Signs of an Imminent Dividend Cut
- High Yield Dividend Stocks in Gurus' Portfolio
- Top dividend stocks of Warren Buffett
- Top dividend stocks of George Soros
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