Many investors prefer using free cash flow instead of net income to measure a company's financial performance because free cash flow is more difficult to manipulate. Free cash flow is the operating cash flow minus capital expenditure.
I have searched for very profitable companies that pay rich dividends and that have a very low price to free cash flow. Those stocks would have to show a very low debt and robust earnings growth prospects. I have elaborated a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research. All the data for this article were taken from Yahoo Finance and finviz.com.
The screen's formula requires all stocks to comply with all following demands:
- The forward dividend yield is greater than 3.0%.
- The payout ratio is less than 65%.
- The price to free cash flow is less than 15.
- Trailing P/E is less than 14.
- Forward P/E is less than 13.
- Debt to equity ratio is less than 0.50.
- Average annual earnings growth estimates for the next five years is greater than 7%.
After running this screen on June 28, 2013, before the market open, I discovered the following four stocks:
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Horace Mann Educators Corp. (HMN)
Horace Mann Educators Corporation, through its subsidiaries, operates as a multiline insurance company in the United States.
Horace Mann Educators has a very low debt (total debt to equity is only 0.19) and it has a very low trailing P/E of 9.81 and a very low forward P/E of 11.23. The price to free cash flow for the trailing 12 months is very low at 6.08, and the average annual earnings growth estimates for the next five years is quite high at 8.0%. The price to book value is very low at 0.78, and the PEG ratio is at 1.23. The forward annual dividend yield is quite high at 3.14%, and the payout ratio is only 31%.
The HMN stock price is 0.60% above its 20-day simple moving average, 6.29% above its 50-day simple moving average and 20.93% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.
Analysts recommend the stock; the two analysts covering the stock rate it as a strong buy and as a buy.
HMN will report its latest quarterly financial results on July 22. HMN is expected to post a profit of $0.33 a share, a 106% rise from the company's actual earnings for the same quarter a year ago. The reported results will probably affect the stock price in the short term.
The compelling valuation metrics, the rich dividend, the fact that the stock is trading below book value and the fact that the stock is in an uptrend are all factors that make HMN stock quite attractive.
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Chart: finviz.com
ManTech International Corporation (MANT)
ManTech International Corporation provides technologies and solutions for critical national security programs in the United States and internationally.
ManTech International has a very low debt (total debt to equity is only 0.17) and it has a very low trailing P/E of 10.60 and a very low forward P/E of 12.24. The price to book value is very low at 0.81, and the PEG ratio is at 1.41. The price to free cash flow for the trailing 12 months is very low at 10.97, and the average annual earnings growth estimates for the next five years is at 7.50%. The forward annual dividend yield is quite high at 3.27%, and the payout ratio is only 35%.
MANT will report its latest quarterly financial results on July 22. MANT is expected to post a profit of $0.56 a share, a 16% decline from the company's actual earnings for the same quarter a year ago. The reported results will probably affect the stock price in the short term.
The very low multiples, the rich dividend, and the fact that the stock is trading below book value are all factors that make MANT stock quite attractive.
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Chart: finviz.com
Silicon Motion Technology Corp. (SIMO)
Silicon Motion Technology Corporation, a fabless semiconductor company, designs, develops, and markets semiconductor solutions for the multimedia consumer electronics market. Silicon Motion Technology Corporation is headquartered in Jhubei, Taiwan.
Silicon Motion has no debt at all and it has an extremely low trailing P/E of 6.95 and a very low forward P/E of 8.11. The PEG ratio is exceptionally low at 0.35, and the current ratio is very high at 4.60. The price to free cash flow for the trailing 12 months is very low at 0.45, and the average annual earnings growth estimates for the next five years is very high at 20%. The forward annual dividend yield is very high at 5.61%, and the payout ratio is only 39%.
SIMO will report its latest quarterly financial results on July 22. SIMO is expected to post a profit of $0.28 a share, a 33% decline from the company's actual earnings for the same quarter a year ago. The reported results will probably affect the stock price in the short term.
All these factors -- the extremely low multiples and the very rich dividend -- make SIMO stock quite attractive.
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Chart: finviz.com
Sun Life Financial Inc. (SLF)
Sun Life Financial Inc., an international financial services organization, provides a range of protection and wealth accumulation products and services to individuals and corporate customers.
Sun Life Financial has a low debt (total debt to equity is only 0.42) and it has a low trailing P/E of 13.38 and a very low forward P/E of 11.29. The PEG ratio is at 1.34, and the price to book value is at 1.24. The price to free cash flow for the trailing 12 months is very low at 14.61, and the average annual earnings growth estimates for the next five years is quite high at 10%. The forward annual dividend yield is very high at 4.76%, and the payout ratio is at 64%.
The SLF stock price is 0.34% above its 20-day simple moving average, 2.91% above its 50-day simple moving average and 9.61% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.
SLF will report its latest quarterly financial results in July. SLF is expected to post a profit of $0.64 a share, the same as the company's actual earnings for the same quarter a year ago. The reported results will probably affect the stock price in the short term.
The compelling valuation metrics, the very rich dividend, and the fact that the stock is in an uptrend are all factors that make SLF stock quite attractive.
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Chart: finviz.com
Disclosure: I am long SIMO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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