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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 U.S. market is deep into earnings season and we thought it may be a good time to seek yield, quality and safety as investors begin tidying up their portfolios before year-end.

The screen

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

Dividend yield is the annualized dividend divided by the share price. Dividends generally reflect safety and stability; all securities listed yield 3 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 dividend cut. Debt-to-equity is our final safety measure. It is the debt outstanding divided by shareholders’ equity. A smaller ratio is preferred.

Free-cash-flow-to-enterprise-value (FCF/EV) is a valuation metric. FCF is the cash left over for investors after all expenses, reinvestments and capital expenditures, while EV is a measure of the company’s total value excluding its cash. The higher the figure, the better the 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 focus on free cash flow because it is more difficult to manipulate than other accounting metrics, such as earnings.

Earnings momentum is the change in annual earnings over the past 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 have provided the 52-week total return to track recent performance.

What we found

U.S. dividend stocks

CompanyTickerMkt. Cap. (US$ Bil.)Div. Yld. (%)Div. Payout (%)Debt/Eqty. (%)FCF/EV (%)Earns. Mom. (%)52W Ttl. Rtn. (%)Recent Price (US$)
Cardinal HealthCAH-N13.84.093.2348.214.24.54.148.73
Int'l Paper Co.IP-N20.73.570.7103.011.89.725.452.98
Omnicom GroupOMC-N14.93.942.2192.410.87.539.870.18
Dow Inc.DOW-N43.44.836.0137.610.041.725.958.71
NRG Energy Inc.NRG-N10.23.228.6517.410.060.326.741.52
Newell BrandsNWL-Q9.64.154.5144.79.913.030.622.47
Walgreens BootsWBA-Q42.43.981.142.78.73.134.149.22
Kraft Heinz Co.KHC-Q44.54.494.056.58.2-0.721.036.22
Newmont Corp.NEM-N46.33.854.129.17.817.1-1.557.91
Gilead SciencesGILD-Q84.34.267.6172.57.710.115.567.67
Amgen Inc.AMGN-Q118.83.467.9350.67.60.8-5.2207.63
Verizon Comm.VZ-N217.74.847.2190.27.43.1-4.552.58
Hasbro Inc.HAS-Q12.33.089.1176.06.424.70.188.50

Source: Refinitiv Eikon & Wickham Investment Counsel Inc.

Dow Inc. and Newell Brands Inc. score fairly well across the board for safety and value; Dow also boasts the highest yield, at 4.8 per cent, along with Verizon Communications Inc. and NRG Energy Inc. has the lowest payout and dominates in earnings momentum, which suggests there could be an opportunity for a future dividend bump. However, it also carries the highest debt load. Newmont Corp., on the other hand, has the lowest debt and looks interesting. Cardinal Health Inc. is the superstar when it comes to our featured metric for the screen, FCF/EV. It also pays a nice dividend.

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.

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