Loading...
 

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 The Buckle, Inc. (BKE) and Stein Mart, Inc. (SMRT) that feature a dividend but carry no short or long-term debt. We narrowed the list down further by requiring companies to have generated average cash flow growth of at least 5% over the last 5 years. Readers can see the results of this screen below.

The Buckle, Inc.

The Buckle, headquartered in Kearney, Nebraska, is a retailer of medium- to higher-priced casual apparel, footwear, and accessories. The company’s products are geared toward fashion-conscious young men and women (aged 15-30), and are marketed under the ‘’Buckle” and “The Buckle” brand names. The merchandise mix consists of denims (36% of July-period sales), tops (32%), sportswear/fashions (13%), accessories (10%), footwear (6%), and casual bottoms and outerwear, which make up the remaining 3%.

As of October 9th, the chain retailer operated 460 retail stores in 44 states, which are primarily located in regional, high-traffic shopping malls, and lifestyle centers. Overall, the company’s commitment to store growth has been impressive. Over the past 10 years, the store count has increased from 316 stores in 2004 to an estimated 466 this year.

The company is coming off a difficult year and has continued to struggle during the first half of fiscal 2014. In fact, comparable-store net sales have been in negative territory since the third quarter of fiscal 2013, largely reflecting a reduction in the number of transactions. However, comps have seen some improvement on a sequential basis, and were positive in the June, July, August and September months, which is a good sign. (Comparable-store net sales are also reported on a monthly basis.)

Looking ahead, The Buckle’s top line should continue to benefit from denim sales, due to its wide array of brand names and private labels, exclusive lines, and superior services, as well as from the maturation of its existing store base, among other things. Too, earnings per share will likely rise, year over year, in fiscal 2014, with continued momentum anticipated in 2015.

The Buckle continues to generate positive cash flow, despite its investments in new store growth, store remodeling projects, IT investments, and the construction of a new office building. Indeed, this favorable cash position, coupled with no short- or long-term debt on its balance sheet, enables the retailer to reinvest in growth and pay a dividend. Specifically, the board of directors increased the quarterly payout slightly in the fiscal first quarter, to $0.22 per share. This will likely be supplemented by a special payout, as has been the case several times since 2007. The most recent was in January of 2014. Investors should also note that the current yield is a cut above the Value Line median. 

Stein Mart, Inc.

Stein Mart is a national retailer that aims to provide the fashion merchandise, service, and presentation of a better department or specialty store, at prices competitive with off-price retail chains. The company sells apparel for both men and women, as well as accessories, gifts, home fashions, and shoes, which are exclusively supplied and owned by DSW, Inc. (DSW, Stein Mart operates the shoe department and receives a percentage of net revenue in accordance with a supply agreement). Its target customers are fashion-conscious, value-seeking 35-65 year old women with above-average incomes. The retailer sells its products in over 260 locations in 29 states, of which 70% are in the Southeast and Texas. These stores are primarily situated in neighborhood, community, and regional shopping centers. The company also has a Website, which was re-launched during the third quarter of 2013.

The retailer has gone through a major turnaround. Over the past few years, management has worked to get the company back on track through stringent cost management, changes in leadership, and refining its merchandise offerings. An improving economy has helped also. We expect the company will stay on this growth path and look for solid year-over-year gains in both fiscal 2014 and fiscal 2015. To wit, Stein Mart’s business is highly seasonal, boasting its best performances in the fiscal first and fourth quarters, which include the spring and holiday seasons.

There are various long-term growth drivers in place. First off, the company is looking to build on its budding e-commerce business (which currently accounts for a meager 1% of sales) by enhancing its Website and launching a mobile platform (expected in the fiscal third quarter). There is clearly plenty of room for growth here. Other potential catalysts include increased brand penetration (added 350+ brands since 2009), focused marketing and advertising, higher penetration of its credit card program, and accelerated store growth. In fact, the company is aiming to increase its store count to 270 locations this year (an almost 4% increase), some of which will be in new markets.

The company’s commitment to return value to shareholders, through dividend payments, stock repurchases, and reinvestments in growth, is impressive. Overall, we believe these value-added activities will continue for the foreseeable future, considering the company’s strong cash flow, healthy cash balance, and debt-free balance sheet. With its solid financial strength, the company’s penchant of paying special dividends may continue as well.

 

Company Name

Ticker Symbol

Div'd Yield

Short-Term Debt

Long-Term Debt

Cash Flow Growth 5-Year

Corrections Corp. Amer. CXW 6 0 0 12.5
Quality Systems QSII 5.16 0 0 6.5
Computer Prog. & Sys. CPSI 3.77 0 0 14
Sturm Ruger & Co. RGR 3.69 0 0 55.5
Cato Corp. CATO 3.6 0 0 7
Weis Markets WMK 3.08 0 0 5.5
Healthcare Svcs. HCSG 2.65 0 0 8.5
Stein Mart SMRT 2.62 0 0 30.5
DSW Inc. DSW 2.52 0 0 22.5
CARBO Ceramics CRR 2.44 0 0 14.5
Price (T. Rowe) Group TROW 2.4 0 0 10
Lancaster Colony LANC 2.3 0 0 7
Qualcomm Inc. QCOM 2.27 0 0 15.5
Fastenal Co. FAST 2.24 0 0 11
Buckle (The) Inc. BKE 2.13 0 0 13
Chico's FAS CHS 2.11 0 0 9.5
Atlantic Tele-Network ATNI 2.1 0 0 14

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