A debt free balance sheet is an impressive statement of financial strength. Although leverage has certain benefits and is, in fact, advisable and appropriate for some industries, operating without debt materially increases a company’s financial flexibility. For example, in lean times, such as a recession, a debt free balance sheet can allow a company to continue operations without interruption. This is a margin of safety that a highly leveraged company may not have.
Investors using dividend income to pay living expenses should find such stocks of particular interest. Indeed, if a company, industry, or the entire economy should fall on hard times, a debt-free balance sheet increases the chances that a company will maintain its dividend payments unaltered. Thus, an investor’s “paycheck” won’t take a hit at the same time that the value of his or her portfolio is taking a hit.
Indeed, such dividend payments can allow the investor to ride out the bad times and the likely corresponding share price decline. Although capital preservation is clearly important, sometimes the best way to preserve capital is to sit tight with a good company regardless of what the emotionally driven stock market is doing. Dividend distributions supported by a strong financial structure should make that easier to do.
To find such companies, we used the online screening tools of The Value Line Investment Survey to cull out companies, such as National Presto (NPK), Garmin (GRMN), and Paychex (PAYX), that have no long-term debt and that pay dividends. Clearly, the screen could be altered to meet the needs of investors looking for a particular level of dividend payments or made more lenient for those who believe a little bit of debt is a good thing.
National Presto Industries, Inc. is a diversified goods manufacturer, which operates three businesses. The Housewares/Small Appliances segment (33% of 2010 sales) designs, markets, and distributes small appliances and gadgets for household use. The Defense Products franchise (50%) produces precision and electromechanical assemblies, medium caliber cartridge cases, and other such items. The Absorbent Products business (17%) manufactures and sells private-label diapers and adult-incontinence products.
The company hit a bit of a snag in the first quarter, posting a 14% share-earnings decline. Management believes that the problem was temporary, mainly due to an issue with inventory in the Housewares/Small Appliance business, and Value Line analyst Erik Antonson seems to agree. Although higher production costs are likely to keep operating margins in check, Mr. Antonson believes that an economic uptick will fuel healthy growth over the remainder of the year.
The stock has been a good source of current income over the past few years, with a dividend yield that has topped 7% in each of the last two calendar years. The balance sheet is clean and, barring an unforeseen downturn, cash flow generation ought to remain solid. Investors should continue to be rewarded by the company’s shareholder-friendly ways going forward.
Garmin Ltd. provides navigation, communications, and information devices that are enabled by global positioning system (GPS) technology. It has two segments: Consumer Products and Aviation. The Consumer Products division is the company’s bread and butter, accounting for 90% of last year’s total sales. Products sold under this umbrella include handheld GPS receivers, portable automotive navigation devices, and fixed-mounted GPS/sounder products used in automotive, marine, and recreational applications. The Aviation business consists of GPS and VHF navigation enabled receivers.
Not typically known as an income provider, Garmin made its way onto the scene last year when the board of directors doubled the income payout. This move, coupled with a steep price decline from the stocks 2007 and 2008 highs, caught Wall Street’s attention and put the company on our dividend screen. Although some, including Value Line analyst Nira Maharaj, have been skeptical about the sustainability of the current dividend payout, the impressive first-quarter earnings beat augurs well for the current distribution. Garmin’s cash hoard, which stood at more than $6 a share as of December, and lack of debt obligations add further appeal.
Paychex, Inc. is primarily engaged in providing computerized payroll-accounting services, salary deposit services, automatic payroll-tax payment, tax-return filing services, and various human resource products and services. It covers more than 525,000 businesses, mostly small to medium in size and employing between 10 and 200 people. The company has approximately 100 offices worldwide.
Paychex’s third-quarter (fiscal year ends May 31, 2011) results were encouraging. Share earnings improved a better-than-expected 16% on 5% revenue growth. That said, Value Line analyst Adam Rosner remains cautious. He looks for operating costs to remain on an upward trajectory and for earnings to grow at a mid single-digit percentage rate this fiscal year and next. However, Mr. Rosner notes that the issue’s attractive dividend yield should compensate shareholders while they wait for the company’s business to strengthen over the next few years. He also expects Paychex to increase its quarterly payout at a gradual pace over the pull to 2014-2016.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.