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What are we looking for?

My team member Allan Meyer and I thought we would highlight one of our favourite valuation metrics, free-cash-flow-to-enterprise-value, by analyzing U.S. dividend payers using our investment philosophy focused on safety and value.

The screen

We started with equities in the S&P 500, a large-cap index. Market capitalization is a safety factor; generally larger companies are more stable and liquid.

Dividend yield is the projected annualized dividend divided by the share price. Dividends generally reflect safety and stability. All securities listed yield 4 per cent or more.

Dividend payout is the dividend payment divided by earnings. A lower number is safer. We’ve capped payout at 100; anything above could be a warning sign of a future cut.

Debt-to-equity is our final safety measure. It is the debt outstanding divided by shareholders’ equity. A smaller ratio is preferred.

Now to the value side of our analysis, and one of our favourite valuation metrics: free-cash-flow-to-enterprise-value, or FCF/EV. FCF is the cash left over for investors after all expenses, reinvestments and capital expenditures, while EV is a measure of the company’s value excluding its cash. A larger number implies better value. All securities listed have a FCF/EV of 6 per cent or more and the list is sorted on this metric from highest to lowest. Allan and I are huge fans of free cash flow because it is more difficult to manipulate than other accounting metrics such as earnings.

Earnings momentum is the trailing 12 months of earnings in the most recent quarter compared with that of the previous quarter. A positive number implies earnings are increasing, which, over the long term, can be a proxy for capital appreciation and dividend hikes. The opposite is true for a negative number. Lastly, we’ve provided the 52 week total return to track recent performance.

What we found

Gap Inc. boasts the best value, lowest debt and is one of the highest dividend payers. However, it also has the highest dividend payout ratio, a cautionary sign. Kohls Corp. pays the best dividend with low payout and debt levels, and good value. Xerox Holdings Corp. is similar to Kohls in terms of dividend payout, debt levels and value, but with worse earnings momentum. Seagate Technology PLC dominates the list in both earnings momentum and total return, but also has high debt levels. Interpublic Group of Cos. Inc., Eastman Chemical Co., Walgreens Boots Alliance Inc. and Hewlett Packard Enterprise Co. score reasonably well across the board for safety and value.

Investors should contact an investment professional or conduct further research before buying any of the securities listed below.

Select S&P 500 dividend stocks

CompanyTickerMkt. Cap. (US$ Bil.)Div. Yld. (%)Div. Payout (%)Debt/Equity (%)FCF/EV(%)Earns. Mmtum. (%)52W Ttl. Rtn. (%)Recent Price (US$)
Gap Inc.GPS-N2.813.196.637.731.5-6.6-69.07.42
Discover Financial Svcs.DFS-N12.44.325.7216.726.1-26.4-47.640.48
Xerox Holdings Corp.XRX-N3.75.833.673.923.0-16.2-44.217.33
Kohls Corp.KSS-N2.815.760.861.417.8-4.9-71.617.90
Interpublic Group of Cos.IPG-N6.36.355.5119.816.10.0-25.816.27
NetApp Inc.NTAP-Q9.54.540.9164.514.6-1.0-34.943.01
Omnicom Group Inc.OMC-N11.54.842.5185.112.90.5-30.053.63
HanesBrands Inc.HBI-N3.26.442.6272.712.7-12.4-44.79.31
Synchrony FinancialSYF-N10.54.919.7131.711.9-12.8-46.117.99
Centurylink Inc.CTL-N10.510.588.7257.611.62.3-4.79.52
H & R Block Inc.HRB-N3.06.750.2275.610.9-0.5-39.015.60
Leggett & Platt Inc.LEG-N3.66.067.8162.210.7-3.1-26.626.87
CF Industries HoldingsCF-N5.94.455.9136.610.51.9-31.227.54
Eastman Chemical Co.EMN-N8.24.442.797.09.13.7-16.960.47
Seagate Technology PLCSTX-Q12.55.337.9196.
Walgreens Boots All.WBA-Q35.74.546.171.68.6-2.0-21.540.66
LyondellBasell Indust.LYB-N17.97.853.5150.08.5-7.4-30.953.73
IBM Corp.IBM-N107.65.462.7301.88.2-3.2-6.1121.23
Whirlpool Corp.WHR-N6.64.532.6156.37.2-1.8-17.3106.90
Hewlett Packard Enter.HPE-N12.35.046.480.86.31.1-34.99.58
Verizon CommunicationsVZ-N230.04.454.8181.

Source: Eikon & Wickham Investment Counsel Inc.

Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.

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