Here at the Fool, we look for companies that are not only producing and growing earnings, but are producing and growing cash. After all, it's cash that lets a company reinvest in future growth and it's cash that we investors receive through dividends and share repurchases.
To find some of those generating the green stuff so that they can give it to us, I set up a simple screen:
- First I wanted companies earning at least 15% on equity. These are more likely to be producing shareholder value than destroying it.
- Then I wanted companies trading at or less than 10-times free cash flow. These are bringing in the cash, but are possibly being underappreciated by the market.
- Finally, I wanted those that were paying at least 2.5% in dividend yield.
From the resulting list, here are three that caught my eye today:
|
Name
|
Return-on-Equity (TTM)
|
Price-to-FCF
|
Dividend Yield
|
|
Frontier Communications (NYSE: FTR )
|
32.6%
|
5.2
|
10.1%
|
|
Windstream (NYSE: WIN )
|
102.3%
|
6.5
|
9%
|
|
Honeywell (NYSE: HON )
|
26.1%
|
8.2
|
3%
|
Source: Capital IQ, a division of Standard & Poor's, and Yahoo! Finance; TTM=Trailing 12 months.
Frontier's recent acquisition of assets from Verizon (NYSE: VZ ) , while tripling the size of the company, also raises concern about the safety of the dividend. The free cash flow that has been used to pay the dividend might instead have to be routed to capital expenditures to support the new assets. The company's already cut its dividend once. Will there be a second cut? Only time will tell. But if the company can sufficiently juggle improving its new assets with keeping costs down, today's yield is extremely enticing.
Another telecom, Windstream, also makes the list. Looking at that ROE number, however, makes me dig in a bit further. Net income for the last four quarters was $320 million and equity was $403 million. Except that net income was made over the course of a year, while that equity number is a snapshot in time at the end of that year. Averaging equity over that year brings it to $313 million, which explains the >100% figure. Two points from this: First, equity is climbing, having been just $223 million a year ago. Second, equity is so low because of the spinoff from Alltel, when Alltel was acquired by Verizon a few years ago, that formed the company. As a result, it has a significant debt load and a low equity level. However, the vast majority of the debt isn't due until 2015 and beyond and operating income is more than enough to cover the interest payments. Add in the fact that the company's free cash flow is well in excess of what is needed to pay the dividend, and things aren't as bad as a surface look indicates.
For a less risky, but also lower, dividend, you can look at Honeywell. It's a significant manufacturer in several different industries including aerospace and automotive. As you'd expect given that profile, it has been hurt by the recession, with the March quarter being the first one out of the last six to show an increase in revenue year-over-year. But it still showed a decline in net income. It reports second quarter earnings on Friday and expectations are for another year-over-year drop in net income. It's not until next year that analysts expect earnings growth. The dividend, however, has held steady. If the company can get back to its growing ways, today's price could end up being a great entry point.
Do any of these deserve a spot in your portfolio? Only you can answer that question after checking into them further. But based on the quick looks above and their relatively cheap prices right now, they do deserve a second look.
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