Here is a list of 15 large cap stocks I ran a screen on this morning. All have double digit returns on equity (REO), free cash flow, a current P/E under 15, and a dividend yield above 3%.
*The definition of a large cap can vary, but generally it is a company with a market capitalization above 5 billion.
Author suggests further research before investing.
Full Disclosure: Author has position in UTX at time of writing.
In the list below you will find 5 small Cap companies Buckle (BKE), Lufkin Industries (LUFK), Raven Industries (RAVN), NutriSystem (NTRI), and Columbia Sportswear Company (COLM). All five have a long history ranging from the newest NutriSystem which has been doing business for 37 years to Lufkin which has been around for over 100 years. All five companies have very little to no debt at all which is important especially in a slower economy. All five have had positive earnings growth for the last five years with strong free cash flow. All five sport a nice dividend which is also a bonus in uncertain times.
Buckle Inc was founded in 1948 and is headquartered in Kearney, Nebraska. The Buckle operates as a retailer of casual apparel, footwear, and accessories for young men and women in the United States.
Lufkin Industries was founded in 1902 and is based in Lufkin, Texas. Lufkin Industries and its subsidiaries manufacture and sell oil field pumping units and power transmission products worldwide. It operates in two segments, Oil Field and Power Transmission.
Raven Industries was founded in 1956 and is headquartered in Sioux Falls, South Dakota. Raven Industries together with its subsidiaries, manufactures various products for industrial, agricultural, construction, and military/aerospace markets in North America. The company operates in four segments: Applied Technology, Engineered Films, Electronic Systems, and Aerostar International, Inc. (Aerostar).
NutriSystem Inc was founded in 1972 and is based in Horsham, Pennsylvania. NutriSystem provides weight management products and services in the United States and Canada. Its weight management program includes primarily of a pre-packaged food program and counseling.
Columbia Sportswear Company was founded in 1938 and is headquartered in Portland, Oregon. Columbia Sportswear engages in the design, sourcing, marketing, and distribution of outdoor apparel, footwear, and related accessories and equipment in the United States, Canada, Europe, the Middle East, Africa, Latin America, and Asia Pacific. The company categorizes its products in four categories: outerwear, footwear, sportswear, and related accessories and equipment.
*The definition of small cap can vary, but generally it is a company with a market capitalization of between $300 million and $2 billion.
LORILLARD - 1760 - Consumer Goods
BANK OF NY ? 1784 - Bank
CIGNA - 1792 - Insurance
WASHINGTON TRUST - 1800 - Community Bank
DUPONT - 1802 - Industrial Diversified Chemicals
COLGATE-PALMOLIVE - 1806 - Consumer Goods
VALSPAR - 1806 - Industrial
JOHN WILEY & SONS - 1807 - Publishing
HARTFORD GROUP - 1810 - Insurance
CITIGROUP - 1812 - Bank
YORK WATER - 1816 - Utility
First, let’s look at America’s oldest dividend paying company, Lorillard, (LO). Many key measurements look attractive for this venerable 249-year old company, which has a very strong balance sheet:
Today’s opening price: $67.04
Dividend Yield: 5.49% ($3.68/share)
EPS next year: $5.82/share
Dividend Payout Ratio: 63.2%
Debt/Equity: 0
Long Term Debt/Equity: 0
Quick Ratio: 1.23
Current Ratio: 1.44
Management efficiency measurements look good also:
Return on Assets (ROA): 32.8%
Return on Equity (ROE): 114.49%
Return on Investment: 75.35%
In terms of price, LO is over 32% above its 52-week low of $50.97, and only 8.61% below its 52-week high of $74.02, so, more conservative investors might want to wait for a possible price pullback here.
Alternatively, you could purchase LO and sell covered calls. The Jan. 2010 $70.00 call option, (LOAN), is currently worth a $3.90 bid.
Here are the data for this trade:
Share Price: $67.04
Call Bid Price: $3.90 (5.82%)
Dividends collected during term: $.92/share, ( 1.37%)
Static Yield, if shares don’t get assigned, (sold away from you): $4.82/share, 7.19%, over this 186-day period, (14.1% annualized).
Assigned Yield, if shares rise to or above $73.90, ($70 strike price plus $3.90/share call bid premium): 4.4% An additional $2.96/share, ($70.00 strike - $67.04 cost)
Total Potential Assigned Yield: $7.78/share, 11.06%, or 22.77% annualized).
Beakeven: $62.22, ($67.04 - $3.90 call premium - $.92 in dividends).
Our next profile is for Valspar, (VAL), an industrial goods company which is in the General Building Materails sub-industry. Here are some key figures for Valspar, which is a bit more leveraged firm than Lorillard, but still pretty solid:
Today’s opening price: $22.27
Dividend Yield: 2.70% ($.60/share)
EPS next year: $1.82/share
Forward Dividend Payout Ratio: 33%
Debt/Equity: .67
Long Term Debt/Equity: .48
Quick Ratio: .87
Current Ratio: 1.17
Management efficiency measurements are fair, not dazzling:
Return on Assets (ROA): 3.78%
Return on Equity (ROE): 8.33%
Return on Investment: 5.03%
VAL has run up over 58% form its 52-week low of $14.14, and currently sits at only 9.43% off its 52-week high of $24.74.
Unfortunately, the put premiums aren’t very rich for VAL. Selling puts into Jan. 2010 would only yield 6.75%, ($1.35 for a $20.00 put).
VAL’s covered calls are a bit richer:
The Jan. 2010 $22.50 call, (VALAX), is currently at $2.05 bid, which yields 9.2% for approximately 6 months, or 18% annualized.
In addition, you’d collect $.60/share in dividends during this term, for another 2.7%.
Your total static yield: $2.65/share, 11.9% for around 6 months, or 23.35% annualized.
Breakeven: $19.62 ($22.27 - $2.65/call premium + dividends)
Potential Assigned Yield: $.23/share, ($22.50 strike price - $22.27 cost). This would give you an additional 1%, if VAL rises to or above $24.55, ($22.50 strike plus $2.05 call premium).
In part 4 of this series, we’ll profile 2 additional firms from our list of America’s oldest companies.
Author: Robert Hauver
LORILLARD - 1760 - Consumer Goods
BANK OF NY ? 1784 - Bank
CIGNA - 1792 - Insurance
WASHINGTON TRUST - 1800 - Community Bank
DUPONT - 1802 - Industrial Diversified Chemicals
COLGATE-PALMOLIVE - 1806 - Consumer Goods
VALSPAR - 1806 - Industrial
JOHN WILEY & SONS - 1807 - Publishing
HARTFORD GROUP - 1810 - Insurance
CITIGROUP - 1812 - Bank
YORK WATER - 1816 - Utility
So, which of these companies has the safest dividend? This is a question with many answers.
As we noted in the 1st article, York Water, (YORW), holds the record for consecutive dividends, having paid 553 consecutive dividends during the 193 years since it was founded in 1816. Their record is certainly impressive and offers some safety. Here’s how they fare in their peers in the broad utility group:
Quick Ratio: .72 puts them in the top rung
Debt-to-Equity: Their 1.35 is the approximate median for this metric
Price-to-Book: At 2.4, their P/B is one of the highest in their group
Dividend Payout Ratio: 84%. Almost in the middle, but this figure ranges from 60 % to 236 % for this group.
Dividend Yield: 3.4% This is near the bottom for Utilities as a whole, as this broad group ranges from 3 % up to 8% +. However, looking at the narrower, water utility group shows a much narrower range, of 3 to 5%, with most companies being around 3%.
All told, YORW is a steady dividend payer that could add stability to your portfolio, particularly if the dividends are reinvested.
Dupont Nemours, (DD), has certainly had a wild ride in the past year, ranging from a high of $46.03 to $15.81. It’s currently at $24.60 and yields over 6.7%. Here’s a look at some other metrics:
Dividend Payout Ratio: 114%. Payout ratios this high are usually a warning signal, but, looking further, we see that DuPont’s EPS forecast for 2010 is $2.05, which, if correct, would bring their payout ratio back down to 80%, which is still higher than the bottom third of the diversified chemical group, but much better than the top third.
Quick Ratio: 1.26 is the 2nd highest in their peer group.
Current Ratio: 1.87 is near the middle of their group.
Dupont’s Price/Cash and Price/Book are currently both a bit pricey, so, you may want to either wait for a pullback, or, try selling puts to get a cheaper price.
October $22.50 puts, (DDVT), are currently bid at $1.25, which equaling a 20%-plus annualized yield, and a breakeven of $21.25.
Alternatively, you might try hedging your bet by buying shares and then selling $25.00 January 2010 calls, (DDAE), which currently show a $2.30 bid, which equals an 18% annualized yield.
In addition, you’d receive $.82/share in dividends during this period, as there are 2 ex-dividend dates before the call option expires.
Adding in this dividend payout brings this covered call trade’s “static” yield to 24.4% annualized, and gives you a $21.48 breakeven.
Since your basis is $24.60, and the call strike price is $25.00, you’ll have one other potential profit on this covered call: If the stock’s price rises to or past $27.30 at or near the Jan. expiration date, your shares will be assigned, (sold), at $25.00, the strike price, giving you an additional $.40/share in profit.
This potential assigned profit brings your total potential profit up to $3.52/share for this 6-month + trade, (over 27.5 % annualized).
In part 3 of this series, we’ll look at more of America’s oldest dividend paying stocks, and try to ferret out some more possible trades.
Disclaimer: This article is written for informational purposes only, and author will not be held responsible for omissions or errors, or for acts taken by third parties as a result of reading this article.
Author: Robert Hauver