What are we looking for?
As a sequel to my previous article focused on TSX stocks, this time, my associate Allan Meyer and I thought we would look at U.S. dividend payers using our investment philosophy focused on safety and value. Once again, we are highlighting one of our favourite valuation metrics, free cash flow to enterprise value (FCF/EV).
The screen
We started with U.S.-listed equities with a market capitalization of $1-billion (U.S.) or more. FCF/EV is a valuation metric – the higher the number the better the value.
(FCF is the cash left over for investors after all expenses, reinvestments and capex while EV is a measure of the company's value excluding its cash.)
As Allan and I like to tell clients, "We like value. We like to buy investments [or anything for that matter] when they're on sale rather than paying fair market value or a premium." All securities listed have a FCF/EV of 0.05 or higher. Some investors, particularly retirees have a desire for income. Allan and I like to get paid while we wait and dividends generally reflect safety and stability. Yield is the current share price divided by the projected annual dividend payments. All securities yield 4 per cent or more.
Payout is the dividend payment divided by earnings. A lower number is preferred and implies dividend safety. It could also signal the ability to raise the dividend. We've capped payout at 100; anything higher could be a warning sign.
Earnings momentum is the change in annual earnings over the past quarter. A positive number indicates earnings are increasing and vice versa for a negative figure. Significant negative earnings momentum coupled with a high payout could be a warning sign of a future cut.
Lastly, we looked at debt to equity. A smaller ratio indicates a company has lower debt levels and can be viewed as a sign of safety. A number under 100 implies a company has enough equity to pay its debt obligations. Generally, we prefer 150 or less but this varies across industries and sectors as many other metrics do.
What did we find?
L Brands and Staples look interesting as they have low debt levels, reasonable payouts, attractive value and positive earnings momentum. The high debt levels on many of the companies shown should be noted.
Investors should contact an investment professional or conduct further research before buying any of the securities listed here.
Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.