Stocks Doing Right by Shareholders

Between shareholder-friendly stocks expected to underperform the market, and highfliers that pay little heed to their owners' interests, you'll find top-flight companies that also treat their shareholders with respect.

Institutional Shareholder Services, the big name in corporate proxies, measures how well a company performs in as many as 63 categories covering four broad areas. Moreover, each company is scored relative to its market index and its industry group. ISS assigns the stocks a rating that it calls its corporate governance quotient, or CGQ.

Some evidence supports the notion that companies with weaker governance have higher risk, decreased profitability, and lower valuations. We'll be looking at stocks that Motley Fool CAPS investors have marked to outperform the market, and which also sport above-average CGQ scores, either in their index group or among industry peers.

Source: Yahoo! Finance, Motley Fool CAPS.
*Relative placement when compared with companies in index or industry. Higher is better.

Although finding good companies and holding them for the long term is one of the greatest secrets to success in investing, there are many factors an investor should consider. How well a company treats shareholders shouldn't be least among them. Consider these rankings one way to gauge how these businesses stack up against one another relative to their shareholder policies.

Go to the head of the class
CAPS member mindfullone55 is rightly concerned about the mountain of debt that American Capital carries on its books. The business-development company breached several debt covenants earlier this year, threatening its solvency. Its stock plunged to below a dollar. As mindfullone55 observes:

If [American Capital] can dodge the pile of short-term debt due, then it has a great chance at getting to a more respectable price. It is priced low probably because of this looming debt, check back around early Jan. to see how it is doing. The book value is just too good not to watch!

American Capital's recently announced debt-restructuring plan gives the company some breathing room, even though it will be pledging substantially all of its assets to do so. Expected to close by year's end, the plan calls for American Capital to immediately pay down $450 million worth of debt, remitting the balance over several years. Yet there is little room for mistakes, since the deal consumes almost all of the $500 million in available cash on American Capital's balance sheet. Without a cash hoard to draw upon, American Capital will have a far tougher time making new deals.

The difficult economic environment probably led rival Allied Capital (NYSE:ALD) to agree to a buyout from a deep-pocketed buyer. American Capital is in a better place now, but it has limited options to grow in the immediate future. It wouldn't be surprising to see the company end up looking for a wealthy suitor, too.

Good medicine
Despite a surprisingly strong third-quarter showing, wireless-technology developer InterDigital believes analysts' fourth-quarter expectations are too high. It sees revenue coming in at around $75 million to $76 million, slightly below the $77.5 million consensus view. However, the smartphone market, for which InterDigital licenses its products, remains primed for further contributions. The negative ruling in its patent-infringement case against Nokia (NYSE:NOK) was a bitter pill to swallow, and an appeal may be in the works.

Considering that analysts expect five-year annualized growth in excess of 20%, InterDigital's multiple of just eight times forward earnings makes it seem just a tad undervalued. When CAPS member rknapton adds in the cash on its balance sheet and compares it with the valuation the market has assigned the company, this All-Star finds it a steal: "Furthermore, this company is SOOO ridiculously cheap because on their $957 million market cap, they have $430 million in cash and virtually no debt! Management has already proven they are shareholder friendly since in March they authorized a $100 million stock buyback and have purchased about a million shares already with this."

A Foolish quotient
Many factors go into whether a stock is a buy or a sell. Do corporate-governance policies enter into your equation? It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page.