What are we looking for?
Today we look at U.S. companies with little or no debt that return cash to shareholders, following yesterday’s screen of Canadian stocks meeting similar criteria.
More about today’s screen
We scanned the companies that comprise the Standard & Poor’s 500 index, looking for those that have low debt and strong dividend payouts to shareholders. Specifically, these businesses have debt-to-equity ratios of less than 50 per cent, annual dividend yields of 2 per cent or more and a dividend payout ratio (i.e. the percentage of earnings paid back to shareholders) of at least 30 per cent. They are ranked by dividend yield in descending order. Interestingly, setting the debt to equity maximum at just 10 per cent, as we did for the Canadian screen, produced only three companies – Paychex, Public Storage and Automatic Data – so we raised the cutoff to 50 per cent.
What we found
The list is weighted toward industrial companies making and selling electrical, semiconductor and automotive parts. It also includes a few financials, pharmaceuticals and firms providing business services.
Investors have spotted value in these companies. Almost all of the 29 stocks have risen over the past year. Eaton Corp., which makes industrial components such as hydraulic products and truck drive trains, has delivered a one-year return of about 40 per cent, as has oil giant ConocoPhillips. Among the few decliners are People’s United Financial Inc., a savings and loan holding company, down 14 per cent, and cruise ship operator Carnival Corp., off 6 per cent.
Cincinnati Financial Corp. leads the rankings. The Fairfield, Ohio-based company sells property and casualty and life insurance. While it’s common for pharmaceutical giants such as Bristol-Myers Squibb Co. and Pfizer Inc. to rank high in terms of dividend payments, its unusual to find a technology firm offering a big yield. Microchip Technology designs and manufacturers microcontrollers and memory products that are embedded into products. The Chandler, Ariz.-based company has steadily raised its dividend over the last nine years.
Several companies, including Microchip Technology, have dividend payout ratios that exceed 100 per cent, which means that in their latest filing period at least, they have paid out more money than they have made. Excessive dividend payout ratios can be a warning sign and payout ratios that are close to 100 per cent signal that it will may be hard for a company to keep increasing dividends.