Sunday 14 December 2008

Dividends Without Debt


Dividends Without Debt

By JACK HOUGH
An 18% dividend yield is usually a warning sign. It might mean investors have little confidence in a company's ability to preserve its share price and keep making payments. Often, debt adds to the anxiety. Newspaper publisher Gannett pays 18%, but has sinking sales and profits and carries long-term debt of nearly double its stock-market value. Capstead Mortgage pays 21%. Its business of borrowing cheap-to-hold government-sponsored mortgage debt isn't as risky as it sounds, unless financing dries up -- something investors are clearly worried about.
Biovail yields 18% and owes nothing. It, too, has warts. But maybe the stock has gotten cheap enough to make up for them.
Ontario-based Biovail, Canada's largest traded drug company, has focused since the mid-1990s on making alternative versions of existing drugs. But the thinning development pipelines of big drug makers have given Biovail less to work with.
Its biggest hit, Wellbutrin XL, has faced generic competition since late 2006. Ultram ER, a once-daily pain pill released in 2006, hasn't caught on as quickly as hoped. Demand for Zovirax, a herpes cream, and Cardizem LA, a pill for high blood pressure, is cooling, too. Companywide sales are on pace to shrink to $748 million this year and $695 million next year. Shares, which multiplied in price from 50 cents in 1994 to more than $50 in 2001, have since fallen below $9.
Biovail is plowing money into purchasing and developing a new roster of drugs, an effort analysts say won't reverse sales declines for at least two years. The company is still plenty profitable. A drop of 50 cents per share in profit this year and another foreseen for next year of 24 cents will leave 2009 profit of $1.13 a share. That puts the stock at less than eight times earnings. But investors have their pick of low-P/E stocks about now.
If they can rely on pocketing 18% for a few years, though, shares are certainly cheap enough. The company can afford the payments. Even with dwindling drug sales, it will clear enough free cash. What's unknown is whether management will fund its new drug efforts with a dividend trim or with already-budgeted research dollars. Shareholders surely hope for the latter. Few investments reward investors as richly at the moment as cash in the pocket.
For more debt-free companies with big dividends, if not quite double-digit ones, have a look at the list below.



Click on the image to get the full version.

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