Cash Flow Trio

11/18/2013 8:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

In a review of the stocks on the recommended list at Dow Theory Forecasts, editor Richard Moroney isolates some favorite companies showing a favorable cash-flow trend, a history of strong dividend growth, and a reasonable payout ratio.

In May, Capital One Financial (COF) boosted its quarterly dividend six-fold to $0.30 per share, restoring it to within 20% of the pre-recession high.

In the four quarters leading up to that dividend hike, cash from operations had risen 47% and free cash flow 46%. Both types of cash flow have continued to grow.

Rising analyst estimates project per-share profits of $1.53 in the December quarter, implying 9% growth, despite a projected 3% decline in sales. Growth in 2014 could become more challenging, though the stock looks cheap, earning a Value score of 89.

Capital One's P/E ratio of nine is lower than more than 90% of stocks in our research universe and 23% below its own five-year average of 12. Capital One, with a 1.7% yield and both Quadrix sector-specific ranks above 90, is a Long-Term Buy.

Shares of diversified manufacturer Dover (DOV) briefly dipped on a mildly disappointing September-quarter report.

However, the company is steadily expanding its operating profit margins. And cash from operations rose 6% through the first nine months of 2013, following three straight years of double-digit growth.

Dover supplements organic growth with acquisitions. Management sees a rich pipeline of potential deals, especially within the energy sector, which accounts for about 27% of company sales.

Dover has raised its dividend for 58 years running, most recently hiking the quarterly payout 7% to $0.375 per share in August. Annualized dividend growth of 11% over the past five years ranks in the top 25% of our research universe. Dover complements the dividend with a stock-repurchase program that has lowered the share count by 8% in the past two years. Dover, yielding 1.6%, is a Focus List Buy and a Long-Term Buy.

Kroger (KR) said October 30 it is prepared to lower prices to preserve sales following the November 1 expiration of a stimulus program that increased the availability of food stamps during the recession.

Kroger also reiterated its guidance for fiscal 2014 ending January, projecting per-share profits of $2.73 to $2.80, up 4% to 7%, versus the consensus of $2.80. Kroger has met or exceeded the consensus in eight straight quarters.

Kroger sees long-term growth of 8% to 11% for earnings per share. Despite plans for higher capital spending, management also says it remains committed to growing the dividend. Dividend growth has averaged 14% a year since Kroger reinstated its distribution in 2006.

Both free cash flow and operating cash flow advanced in the four quarters leading up to Kroger's 10% dividend hike in September. Kroger, yielding 1.4%, is a Long-Term Buy.

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