2 Dividend Stocks That Are Stronger Than They Appear

If you're a serious investor in dividend stocks, you know that a high yield alone simply isn't enough. You have to know that a dividend is sustainable, and that the underlying company has decent prospects for the future.

One industry that investors have abandoned as having zero prospects is printing. As more and more newspapers and magazines transition to electronic formats, investors have assumed these businesses are dead.

But that may not necessarily be the case, and by investigating the situation, you may be able to buy two big dividend stocks while they're still cheap.

R.R. Donnelley & Sons (NASDAQ: RRD  )
This company, based out of Chicago, has been an industry stalwart since its founding in 1864. Back then, founder Richard Donnelley printed the precursor to the Yellow Pages for Chicago residents.  

Today, the company has 60,000 customers and is transforming itself to focus on three key areas: its traditional print solutions, as well as two newer divisions -- digital solutions and supply chain solutions. To build out all three divisions, the company has been on a merger-and-acquisition blitz for the past 20 years, which has led to a significant amount of debt -- roughly $3.5 billion, to be exact. 

When you couple that debt with the fact that the company has gone two years without turning a profit, you can understand why investors aren't too excited to own shares. Currently, Donnelley shares trade for 7.7 times 2013 earnings, and that has caused the dividend yield to jump to 8.2%.  

A deeper look at the company's cash flow statement, however, shows that the dividend payment is more than healthy for now.

Free Cash Flow (2012)

Dividends Paid (Expected 2013)

Payout From Free Cash Flow

$486 million

$187.1 million

38% 

Source: SEC filings.

A 38% payout from free cash flow is actually pretty low, meaning that the company has quite a bit of wiggle room to maintain its dividend. Donnelley, in fact, has been paying the same dividend since 2003.

The reason the free cash flow isn't evident in the company's earnings is that impairment charges, as well as depreciation and amortization, have weighed heavily.

The former is the result of a company admitting that it overpaid for an acquisition, and the latter is standard for companies that have large capital purchases. The important thing to understand, though, is that neither of these affects how much cash Donnelley brought in or paid out over the past year.

Quad/Graphics (NYSE: QUAD  )
This Wisconsin-based company has contracts to print magazines for many of the country's biggest customers -- including magazines from Hearst (Redbook, Cosmopolitan, Esquire, etc.) and Meredith (Better Homes and Gardens) -- as well as for clothiers such as J.Crew, L.L. Bean, and American Eagle Outfitters.

For its first 40 years, the company was private. But in 2010, Quad/Graphics acquired its largest rival, World Color Press. To avoid taking on too much debt in the acquisition, the company went public.

Like Donnelley, Quad/Graphics is focusing on using technology to help clients get more bang for their advertising and distribution bucks. Print media obviously plays a role in this strategy, but it is one part of the whole now, rather than the whole itself.

Concerning the company's 5.3% dividend, here's a look at how healthy it is:

Free Cash Flow (2012)

Dividends Paid (Expected 2013)

Payout From Free Cash Flow

$250.7 million 

$56 million 

22%

Source: SEC filings.

Like Donnelley, Quad/Graphics' earnings don't appear nearly as high as free cash flow, but that's due to impairment, as well as depreciation and amortization, charges.

If I had to pick one
Though I think both of these dividend stocks are worth investigating, I would have to say that Quad/Graphics is a better bet.

Reading through the annual report for both companies shows that Quad/Graphics does a much better job spelling out how it will attempt to meet the demands of a changing industry. And though it does have a history with some acquisitions, it's not nearly the serial acquirer that Donnelley is.

If you'd like to dig further into dividends, and you're an investor who prefers returns to rhetoric, you'll want to read The Motley Fool's new free report, "5 Dividend Myths ... Busted!" In it, you'll learn which stocks provide premium growth and whether bigger dividends are better. Click here to keep reading. 


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