One of the things I really focus on when looking for a suitable investment is a great balance sheet. I want to own a company with plenty of cash and little debt. Sometimes I’m willing to make exceptions for unusually durable businesses, but overall, I try to keep my portfolio filled with companies that boast better-than-average financial strength. These are not necessarily recommendations, and a closer look is of course required, but here are seven companies that might be appealing to investors looking for a high-quality financial situation:
Automatic Data Processing (ADP)
Automatic Data Processing is one of the world’s largest outsourcing companies. ADP deals with human resource needs, benefits, payroll, and computing processes for many companies around the world. They prepare employee payroll checks, direct deposits, and tax reports. They capture, calculate, and record employee time and attendance. They perform hiring services. They provide record-keeping and administrative services for retirement plans. Basically, if it’s an uninteresting part of a business, ADP can help with it.
Total Debt/Equity: 0.01
Dividend Yield: 3.12%
Full ADP Analysis
Exxon Mobil (XOM)
Exxon Mobil is one of the largest oil and gas companies in the world, and has one of the best balance sheets in the business. With a market capitalization of approximately $350 billion, the company is absolutely massive. XOM has investments in both oil and natural gas, and has both upstream and downstream projects. The company has a great long-term return on equity, and they spend considerable amounts on share buybacks in addition to paying the dividend.
Total Debt/Equity: 0.13
Dividend Yield: 2.47%
Costco Wholesale (COST)
Costco is a very high quality, growing company with a developing economic moat and a very, very strong balance sheet. The company has a better balance sheet than Walmart (WMT), and most of the equity is real rather than consisting of a lot of intangibles or goodwill. Costco is approaching a count of 600 stores and is expanding internationally in Canada, Mexico, UK, Japan, South Korea, Taiwan, and Australia. Due to the fairly high valuation, the dividend yield is a bit on the low side.
Total Debt/Equity: 0.20
Dividend Yield: 1.20%
Full COST Analysis
Microsoft, the software juggernaut, has a fairly low valuation and still has a very strong balance sheet. Microsoft is the maker of Windows, Office, Xbox, and other products, but is having its economic moat threatened by its less-than-desirable performance in the mobile operating system and mobile electronics devices markets.
Total Debt/Equity: 0.22
Dividend Yield: 2.46%
Analog Devices (ADI)
This company produces a variety of high performance analog and signal processing systems. Analog systems convert signals in the real world, like temperature or pressure, into electrical signals that can then be interpreted by the rest of an electrical system. The company has a current ratio of over 5, which means they have a ton of cash on hand in addition to their low debt levels.
Total Debt/Equity: 0.13
Dividend Yield: 2.40%
National Presto Industries (NPK)
National Presto is a small, diversified company. The company makes cooking appliances, diapers, and ammunition. NPK pays an annual special dividend and regular dividend, and for the past several years, the total dividend yield has been considerable. The company has zero debt and a current ratio of over 5, which is spectacular. There is considerable inside ownership, and the stock valuation is fairly low.
Total Debt/Equity: 0.00
Dividend Yield: 6.50% (including special dividend)
Full NPK Analysis
The Buckle (BKE)
The Buckle is a retailer with zero debt that sells medium and higher priced casual apparel to young men and women. The dividend can be unpredictable due to special dividends. Much like NPK, there is considerable inside ownership. This year, regular dividends plus the announced special dividend total $3.30 which translates into a yield of over 8%.
Total Debt/Equity: 0.00
Dividend Yield: Varies
Full Disclosure: At the time of this writing, I own shares of XOM and NPK.
You can see my individual holdings here.
Good article. To the point.
Im interesting to focus in an investing methodology. Something clear, common sense, systematic and practical.
Do you suggest me some method??
I agree with Matt on the basis for his selection of dividend paying companies. I do however think the discussion should open up on why an invester requires that a company paying dividends be included in one’s portfolio.
The question should be asked if all things considered are equal is one dividend as good as another. Why should a 2 or 3% dividend even be considered if an invester is looking for retirement income? The answer of course is that it shouldn’t be considered if there are dividends in the 7 to 10% range from equally strong companies.
However, a case can be made for growth stocks that have a history of dividend payments that are growing on a steady basis. Most utilities for example pay a fixed percentage and it stays the same year after year. Off the top of my head I can think of Johnson and Johnson & Coke that both pay a dividend and increase that dividend on a yearly basis. Yes it is a small percentage dividend but when one adds the growth of the stock and the dividend the return is similar to higher paying dividend stocks.
My point of course is that one can live on the dividends from the utility but would starve on the dividend from J & J. If time is not a factor I would be inclined to go with the stock that had steady growth and paid a small but growing dividend. In my case I like the steady monthly income from dividend paying stocks.
I also have to comment on his selection of National Presto Industries. (NPK) When a company makes diapers and ammunition they pretty much have all the bases covered. Ha ha ha
Good1, balance sheet often gets forgotten by the heard. Many swedish industry companies have terrible balance sheets but noone seems to care. Massive rally this year based on the hopes of future profits rocketing. Profit will probably increase a lot when the economy is getting better again. But sooner or later there will be downturns again and at todays levels there is no margin at all for that.
It might just be that im bitter since my portfolio has been owned by the index:)
I like that you add a few “new” companies that you havent mentioned much before.
I like these types of quick, punchy posts about some of the “best of the best”, thanks for this Matt.
Curious about your take on ADP, any thoughts of owning this one someday?
My Own Advisor
Great points Steve.
Sorry to hear about Swedish balance sheets Defensiven. I try to keep companies with lackluster financial situations to a minimum in my portfolio.
Up there in the article where I talk about ADP, I have a link to my full ADP stock analysis which covers most of my thoughts. More recently, with a higher stock price, I think it’s a great company, but at the most recent price, I think there are more attractive investment opportunities out there.