Waiting For A Payout

5/1/2017


Of our 34 recommended stocks, 10 do not pay a regular dividend, all shown in the table below. To identify companies most likely to launch a dividend, we need to consider management's ability and willingness to pay one.


Taking the initiative on dividends

Seven S&P 500 companies launched a dividend last year, the same number as in 2015 but below the 10-year average of 10. Most of our recommended stocks that don't yet pay a dividend appear to have the financial flexibility to launch one.

12-Month Free
---- Cash Flow ----
Cash
($Mil.)
Total
Debt
($Mil.)
Net Cash
($Mil.)
Net
Cash/
Share
($)
Net Cash
As % Of
Share
Price
Company (Price; Ticker)
Change
(%)
Total
($Mil.)
Alphabet ($889; GOOGL)
60
25,824
86,333
3,935
82,398
118
13
Celgene ($125; CELG)
70
3,740
7,970
14,289
(6,320)
(8)
NM
Centene ($73; CNC)
300
2,560
5,564
4,647
917
5
7
Citrix Systems
($84; CTXS)
12
982
1,684
1,348
336
2
3
CommScope
($42; COMM)
119
538
428
4,562
(4,134)
(21)
NM
F5 Networks
($137; FFIV)
(1)
633
974
0
974
15
11
Facebook ($147; FB)
91
11,617
29,449
0
29,449
10
7
LabCorp of America
($138; LH)
12
1,007
366
5,921
(5,556)
(53)
NM
Mohawk Ind.
($238; MHK)
61
655
122
2,524
(2,402)
(32)
NM
VMware ($94; VMW)
42
2,228
7,985
1,500
6,485
16
17
NM Not meaningful.

Most of these 10 companies appear financially capable. They all generate positive free cash flow, the fuel needed to fund capital returns. And all but F5 Networks ($137; FFIV) grew free cash flow more than 10% over the past 12 months. Additionally, more than half of the companies possess more cash than debt on their balance sheets.

As for willingness, these companies seldom address the topic of dividends on conference calls with analysts. But we have gleamed some insights over the past couple years.

Alphabet's ($889; GOOGL) hiring of Ruth Porat as CFO in March 2015 gave investors hope that the 28-year veteran at Morgan Stanley ($44; MS) would push the company to loosen its purse strings for shareholders. Although Alphabet launched its first stock-buyback program in October 2015, Porat has sidestepped questions about a dividend. In the past, the company has said, "We don't have religion about cash and hoarding cash."


Celgene ($125; CELG) said in January that it's open to a dividend, though it first wants to see how several key experimental drugs perform in late-stage trials over the next two years.


Citrix Systems ($84; CTXS) has historically sought to return at least half of free cash flow to investors through stock buybacks. It increased its share-repurchase program by $500 million in January. Management has also said that it would address its capital-return strategy following its GoTo spin-off, completed on Feb. 1.


Laboratory Corp. of America ($139; LH) has said that it discusses the possibility of a dividend when planning its capital-returns strategy, though management continues to prefer stock buybacks. In February, LabCorp forecasted record free cash flow for this year and said it expects to redeploy all of that cash for acquisitions, debt repayment, and capital returns to shareholders.


Which of these companies represent the best bets to introduce a dividend? Citrix is a strong possibility. Free cash flow rose 12% to $982 million in 2016; its balance sheet contains net cash of $336 million; and its capital spending is poised to drop sharply. All these factors, combined with management's willingness to "continue to talk and look at capital structure on a broader basis," as stated in January, may inspire a dividend initiation later this year.

By the numbers, VMware ($94; VMW) also looks like a good candidate. But the company is about 80% owned by Dell Technologies ($67; DVMT), which may prefer VMware hold on to its cash. Still, VMware has a well-capitalized balance sheet, with net cash equaling $6.49 billion. Plenty of technology companies have introduced quarterly distributions when operating growth begins to slow — as appears to be the case for VMware.


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