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Stock Screen: Debt Free Dividend Payers - November 18, 2011
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 firm 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 identify companies, such as Chico’s FAS, Inc. (CHS), Expeditors International of Washington, Inc. (EXPD), and Resources Connection, Inc. (RECN), that have no long-term debt and 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.
Chico’s FAS, Inc.
Chico’s FAS was founded in 1983, and is a specialty retailer of private-branded, casual-to-dressy clothing, intimates, accessories, and other non-clothing gift items for women. The company has three well-known store labels under its umbrella, which include Chico’s, White House/ Black Market, and Soma Intimates “Soma”. The Chico’s brand targets women 35 and older, while White House/Black Market caters to the 25-year plus population. Including all three store concepts, CHS’ retail base stands at 1,151 stores (as of 1/29/11).
The company has put forth a solid showing of sales and earnings gains thus far in 2011. Indeed, customer traffic has been brisk due to effective marketing and promotional activity. The inclusion of more trendy fashion offerings has been generating favorable customer perceptions. But, the main expansion catalysts at the moment are additional White House/Black Market store openings and the recent acquisition of Boston Proper, an online retailer of women’s apparel. Management currently expects third-quarter comps to rise in the mid-single digits, and we view this outlook as achievable if not conservative. Note: The company is scheduled to release October-quarter earnings on November 22nd.
The company instituted dividend payments in 2010, and is in a good position to have this program continue, thanks to a strong balance sheet with ample cash and no debt. Further, according to our projections, Chico’s has favorable near- and long-term income prospects.
Expeditors International of Washington, Inc.
Expeditors International provides global logistics management services, including freight forwarding and consolidation, for both air and ocean freight. The company does not operate its own vessels. Instead, it generates revenues by purchasing transportation services from carriers in bulk and then reselling them to customers at a higher rate. It also prepares shipping and export documents in order to clear customs, calculates payment of duties and other taxes, arranges required inspections by governmental agencies, collects freight upon arrival at its destination, and manages purchase orders. Expeditors’ customers include department stores and other retailers, electronics suppliers, and catalogs, but it does not compete in the small parcel space. In the September quarter air-freight services were 36% of total sales, ocean freight represented 24%, and customs services contributed 40% to the top line.
The company has been facing some near-term challenges, such as lower shipment volumes from Asia due to lethargic U.S. consumer demand as well as difficult comparisons. Still, the company was able to grow third-quarter net revenues (total revenues – consolidation and custom expenses) 8% year over year, as air carriers anticipated higher demand levels than actually materialized, resulting in excess capacity and positive buying opportunities for EXPD. If the upcoming holiday shopping season turns out to be strong, the company ought to benefit from retailers’ last minute shipping needs due to their currently lean inventories. However, this is far from guaranteed, which adds an element of risk to the stock. Looking long term, rising deliveries within Asia should support top-line gains.
Despite short-term uncertainty, the company is maintaining a healthy balance sheet. At the end of the third quarter, EXPD had $1.26 billion in cash and no debt. The strong financial position ought to sustain ongoing dividend payments, which have consistently increased since 1997.
Resources Connection, Inc.
Resources Connection operates under the name Resources Global Professionals. The company provides finance, accounting, risk management, and supply-chain services (among a host of others) to clients on a project basis. In addition, it offers other services such as legal and regulatory advice through the procurement of lawyers, as well as proper documentation services including policies and other business procedures. In fiscal 2011 (year ended May 28, 2011), the company served over 1,900 clients.
The Industrial Services Company is well positioned to post solid results in both the near and long term. Demand is particularly high in the Asia/Pacific region and in Europe. Indeed, corporate profits have been recovering nicely and firms seem to be undertaking more normal levels of business development. This should lead to ongoing demand for RECN’s services, since companies are likely to spend more freely on new projects or develop existing ones that were placed on the backburner. Also, the company provides increased flexibility during these uncertain economic times when clients do not want to hire permanent employees.
Investors may find the equity appealing because its growth platforms are pegged to contribute to solid long-term appreciation gains over the 3- to 5-year benchmark. Furthermore, the company is sharing some of its good fortune with shareholders in the form of a newly-instituted dividend payment plan and a share repurchase program. And, with a solid balance sheet with almost $130 million in cash at the end of the August period, and no debt obligations, RECN should be able to continue paying a dividend for the foreseeable future. We think the recent share-price decline has provided a decent entry point for patient investors. Still, less-aggressive accounts should probably look elsewhere as the current P/E ratio is only average.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.