Monday, September 02, 2002

Where's the Cash?

You can't trust earnings anymore. So what should you look for? Dividends. They are harder to fake. We went hunting for stocks with solid cash dividends but didn't do the obvious thing: Rank all stocks by yield and select the highest. If you simply want the highest yields, go for real estate investment trusts (see p. 126). Or take a chance on tobacco. On page 140 David Dreman makes the case for Philip Morris, which yields 4.7%.

The list below features dividend stars of a different sort. Their yields are only so-so, averaging 2% or so, but their dividends are well covered and rising. The percentage of earnings being paid out is small. Only a deep and prolonged earnings contraction would force these outfits to shrink their payouts. These companies have been raising dividends recently (three-year growth of 3% or better). They also all have good balance sheets: debt less than 50% of total capital and interest coverage (earnings before interest and taxes, divided by interest) greater than 1.5.

Headquartered in Menasha, Wis., Banta Corp. prints everything from Bibles to software manuals. Banta earned $50 million last year on revenue of $1.5 billion and distributed $15 million of that to shareholders. Banta's free cash flow, in the sense of net income plus depreciation minus capital expenditures, has been positive for the past ten years.Michael Friedman, equity analyst with New York brokerage Sidoti & Co., notes that the company has recently trimmed capital expenditures in light of the economy's downturn. Shareholder payouts first, expansion second.

Contrast Banta with a stock such as Bristol-Myers Squibb, which now yields a robust 4.8%. Using the consensus mean estimate for 2003 EPS, Bristol-Myers shows a payout of 69%. Switch to the most pessimistic profit projection for next year, and the expected payout climbs to 78%--not exactly reassuring.

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