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% in dividend yield.
From the resulting list, here are three that caught my eye today:
|
Company |
ROE (TTM) |
Price-to-FCF |
Dividend Yield |
|---|---|---|---|
|
Annaly Capital Management |
21.2% |
1.0 |
15.2% |
|
Huntsman |
17.2% |
4.2 |
4.0% |
|
Innophos Holdings |
15.1% |
8.4 |
2.4% |
Source: Capital IQ, a division of Standard & Poor's, and Yahoo! Finance; TTM=Trailing 12 months.
Annaly Capital is a real estate investment trust (REIT), so the large dividend it sports is not entirely surprising. It trades agency-backed mortgage bonds, keeping for itself the spread between what it borrows to fund what it buys. It also is the external manager of a couple of other REITs, Crexus
Frankly, I was surprised that Annaly Capital showed up on this screen. The large amount of free cash flow is a new thing, having jumped up from $1.1 billion in 2008 to $11.4 billion over the past four quarters. That seems to be a function of its formation of RCap Securities, its broker-dealer subsidiary. In the cash flow statement, the vast majority of that $10 billion increase in cash flow comes from the difference between proceeds and payments on "repurchase agreements from Broker Dealer." If you can understand what it is doing, it could make a very nice addition to your portfolio. But don't be tempted to buy it if it lands in your "too hard" category.
Plus, the fact that it passed the screen at all shows the dangers of blindly relying on a screen. Free cash flow for this screen is calculated as cash from operations minus capital expenditures. There are no "capital expenditures" listed on the company's cash flow statement, but it does do other business-related actions ($5.8 billion in net investments) that would reduce that free cash flow considerably. So, just because a company passes a screen doesn't mean it's a company you meant to find.
A more traditional company, Huntsman is in the business of making chemical products used in a wide variety of industries and products. While it reported a loss for the first quarter, it did say that demand for its products was increasing during the first quarter and, at least, on into April (it reported in early May). All of its major segments -- polyurethane, textile effects, etc.-- saw increases in revenue compared to last year. If that trend held in the second quarter and holds for the rest of the year, it is an indicator that the economy is turning around, albeit slowly. As that happens, this company will benefit. In the meantime, its 4% dividend is a nice bonus.
Finally, Innophos Holdings is a maker of specialty phosphates used to improve flavor, texture, or other desired properties, used in a range of products from baked goods and toothpaste to asphalt. At the end of 2005, about a year before it went public, it had nearly $530 million in debt. It has since used its cash flow to pay that down to $246 million. As it continues to pay down debt, it will free up cash for other purposes such as reinvesting in the business -- it is moving away from producing phosphates for detergents, for instance -- and, eventually, returning it to shareholders.
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.
