This can be a difficult climate to be in as a fundamental investor. This is because earnings are such a difficult thing to forecast right now. One of the biggest issues is the fact that many companies are withdrawing guidance. Sarah Keohane Williamson, CEO of FCLT Global commented on this issue:
“It’s a step in the right direction that such a large number of companies have opted to suspend guidance, regardless of the circumstances that caused them to arrive at that decision.”
While it may be a step in the right direction where the outlook isn’t clear, it makes it harder for investors to evaluate. As a function, it requires the way you potentially evaluate a company. For example, balance sheet considerations may be more important that income statement considerations.
When looking at whether a company is a going concern, the amount of debt a company carries is important and the ability to service the debt. The use of debt-equity ratio and the current ratio can help with this. Another consideration is the amount of cash relative to debt.
When you scan the market for these types of criteria that includes a relatively attractive dividend yield, it becomes clear really fast that many large cap companies are not in a great position to meet the criteria. As you start to look at small to mid-cap companies the number of companies expands.
The following list of companies pay a dividend yield of 3% or higher, have low debt and relatively high cash-to-debt levels.
High Yield Stock #1: PetMed Express, Inc (PETS)
PetMed Express is a $659 million company that markets prescription and non-prescription pet medications, and other health products for dogs and cats, direct to the consumer. In an environment where going to the store is more complicated, you could say this stock falls into a category of social distancing companies.
PETS pays a 3.3% dividend yield and has grown its dividend at a rate of 10.8% a year for the previous five years. The company has no debt and maintains a current ratio of 5.3.
The current valuation for PETS is a little on the higher side, but the dividend yield is still compelling. A consideration for improving your price and a higher dividend is through selling puts. The 17 JUL 20 $25 put can be sold for around $0.95. If the stock stays above $25 by expiration you keep the $0.95 or 4% ROR. If the stock falls, you buy the stock at $25 for a net cost basis of $24.05 and a 4.6% yield.
High Yield Stock #2: Silicon Motion Technology Corp. (SIMO)
Silicon Motion is a $155.6 million company that provides negative-AND (NAND) flash controllers for Solid State Drives (SSDs) and other solid state storage devices. The semiconductor space is more cyclical, but the use of flash technology is likely to continue as the age of the Internet of Things (IoT) only continues to grow.
SIMO pays a 3.14% dividend yield and has grown its dividend at a rate of 19.2% a year for the previous five years. The company has no debt and has a current ratio of 4.53.
Similar to PETS, SIMO would be more attractive at a lower price and higher yield as a dividend investor. The 17 JUL 20 $35 put can be sold for around $1.10. If the stock stays above $35 by expiration you keep the $1.10 or 3.2% ROR. If the stock falls, you buy the stock at $35 for a net cost basis of $33.90 and a 4.1% yield.
High Yield Stock #3: Medifast Inc (MED)
Medifast is a $1.03 billion company that produces, distributes, and sells weight loss, weight management, and healthy living products, and other consumable health and nutritional products. This is another company that can operate in the current climate and could be considered a social distancing company.
MED pays a 4.29% dividend yield and has grown its dividend at a rate of 46.7% a year for the previous three years. The company has a debt/equity ratio of 0.12, a cash/debt ratio of 8.22 and a current ratio of 1.97.
From a valuation standpoint, MED is trading near historic lows and has an attractive price-to-yield relationship. If you’re looking to buy MED at a lower price the 17 JUL 20 $75 put can be sold for around $3.90. If the stock stays above $75 by expiration you keep the $3.90 or % ROR. If the stock falls, you buy the stock at $75 for a net cost basis of $71.10 and a 6.3% yield.