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A debt-free balance sheet is often an indication 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 balance sheet sans debt 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 distribution unaltered. Thus, an investor’s “paycheck” won’t take a hit at the same time that the value of his or her portfolio is declining. 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 conserve 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 make that easier to do.

To find such companies, we used the online screening tools of The Value Line Investment Survey to identify companies, like Accenture (ACN) and Visa (V) that feature a dividend but carry no debt. 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.


Accenture

This leading management consulting, technology services, and outsourcing organization, which operates in over 200 cities across 54 countries has a squeaky clean balance sheet, all the while offering investors a worthwhile return on their investment. The global company generates revenues before reimbursements through five segments; Communications, and Media & Technology; Financial Services; Health & Public Services; Products; and Resources. Since the 2008 financial crisis, Accenture has shown modest, yet consistent top- and bottom-line growth, which has translated into a steadily rising stock price. In fact, the stock is trading in the vicinity of its all-time highs. Sound fundamentals likely played a large role in the company’s standout performance over the past few years and ought to remain a key growth catalyst further out. Indeed, the environment in which the company operates in is highly competitive and rapidly changing, thus placing an even greater importance on financial flexibility and efficient deployment of capital.

Historically, Accenture’s balance sheet has been relatively unlevered, with an extremely low debt-to-equity ratio. It was not until 2009 that the company adopted an all equity capital structure, eliminating all debt from its books. With zero interest payments on the horizon, cash that would otherwise be used for repayments can be put to work elsewhere. Further, the transition makes sense, considering the company’s solid track record of free-cash-flow generation. In the third quarter of fiscal 2013, ACN generated $1.4 billion in FCF. Additionally, management has stated its intentions to purse a global growth strategy, specifically looking to increase its presence in emerging markets. As always, there is a degree of uncertainty surrounding an aggressive expansion plan, however, a large cash hoard should help mitigate the risk, and increase the likelihood of a positive outcome. Lastly, by remaining liquid, the company has built up a nice buffer against a macroeconomic slowdown or an unforeseen hiccup in demand.

In line with a strong cash position, Accenture has been extremely generous to shareholders over the years. Subsequent to initiating a dividend payment in 2006, the company has increased its payout rather substantially, with the exception of the marginal reduction in the 2010-2011 time period. Currently, ACN offers investors a decent 2.0% yield, roughly mirroring the broader market averages. According to our detailed report in the Value Line Investment Survey, the dividend payout is poised to rise over the long haul, maintaining its attractive rate of return. Alongside the company’s impressive mark for Financial Strength (A++), its average yield might be a bit more appealing to conservative accounts. 

Visa

One stock that meets our investment criteria is the world’s largest and extremely well-known electronic payment network provider, Visa, connecting consumers, businesses, banks, and governments in over 200 countries across the globe. Its product platform consists of credit, debit, and prepaid cards, as well as commercial payment methods. Electronic payments have come into the lime light, thanks to the ease and speed of transactions, alongside greater range of usage compared to physical cash and check payments. In fact, the company’s growth has not gone unnoticed. The stock price has been on a tear since early 2009, surging more than 350% over that time frame. Solid annual EPS expansion, which is expected to persist in 2013 and 2014, largely attributed to the stellar run.

Indeed, the majority of Visa’s business is derived from consumer and business spending, and flourishes in times of economic expansion versus periods of contraction. Undoubtedly, tighter purse strings for retail shoppers will equate to snugger spending habits and lower consumption rates, ultimately leading to lackluster appetites to purchase on credit. To no surprise, a debt free, liquid, flexible balance sheet helps Visa navigate periods of tepid cash flow generation due to a downswing in the economy. The absence of debt repayments allows the company to sustain a strong level of cash on hand, all the while maintaining its ability to return value to shareholders by means of dividend payments. At present, Visa boasts a somewhat uninspiring yield (0.70%), although an unlevered balance sheet, strengthening fundamentals, and a solid track record of year-over-year dividend hikes may suggest an improvement in this department in the years ahead.

Moreover, a strong financial footing (Visa garners our highest mark for Financial Strength: A++) should instill confidence in investors, regardless of the state of the economy. On top of that, the company is expanding its market share in regions that are experiencing rapid growth, namely Latin America and the Middle East, further supporting operations if the domestic climate falls on harder times. Business outside of the U.S in steadily increasing, accounting for more than half of Visa’s credit card transactions last year.  All in all, investors looking to bolster the income section of their portfolios, while simultaneously minimizing their exposure to contractions and troughs in the economic cycle may find these shares of interest. 

At the time of this article's writing, the author did not have positions in any of the companies mentioned.