The quickest way to go bankrupt is to have too much debt on the balance sheet. As an income investor, one way to protect yourself from that risk is to focus on companies with low leverage. Taking it to the extreme, The Cheesecake Factory Incorporated (NASDAQ:CAKE), NutriSystem Inc. (NASDAQ:NTRI), and GameStop Corp. (NYSE:GME) all pay dividends and have no debt.
Debt
Financial leverage can be a powerful tool, allowing companies to expand more quickly than they would otherwise. Leverage isn’t so much of an issue when things are going right, but when they go wrong interest expenses can cut deeply into profits. If there isn’t enough money to cover the interest, the creditors can wind up owning the company.
This can be a shocking turn of events for investors, who normally wind up with little or nothing in a bankruptcy. Different businesses can support different levels of debt so there is no one rule to follow. For the most conservative investors, however, insisting on a balance sheet with no long-term debt is one way to guard against bankruptcy.
No long-term debt, however, doesn’t make a company a good investment in and of itself. Here are a few examples of debt-free companies that might interest dividend focused investors, or not:
The Cheesecake Factory Incorporated (NASDAQ:CAKE)
The CheeseCake Factory Incorporated (NASDAQ:CAKE) ended 2012 with over 170 restaurants, primarily under its namesake brand. The company’s store format is highly stylized and its menu offers a wide array of foods with a distinctively upscale feel and moderate price points. At the end of 2012, the company had no long-term debt on its balance sheet.
With less than 200 restaurants, Cheesecake’s market penetration is relatively low compared to larger competitors like Olive Garden and Red Lobster, which had 818 and 705 locations, respectively, at the end of February. Moreover, The CheeseCake Factory Incorporated (NASDAQ:CAKE) is expanding internationally, something that Darden Restaurants, Inc. (NYSE:DRI), the owner of the above competitors, has only just begun to explore.
Although Cheesecake’s revenue and earnings took a dip during the recession, they have been on a generally upward path for years. To make things even more enticing, the company initiated a dividend in the second half of 2012. Dividend investors should take a look at Cheesecake’s still notable growth prospects. Even though the yield is relatively low, dividends tend to grow most quickly during the first few years after their initiation.
NutriSystem Inc. (NASDAQ:NTRI)
NutriSystem ended 2012 with no long-term debt on its books. That’s a good thing because its top line has been on a downward slope since peaking in 2007. That date coincides with the start of the 2007 to 2009 recession. The slow recovery hasn’t been enough to turn results around yet, but with little leverage, the company has some time to work through its current difficulties.
The big problem for NutriSystem is that its diet products are expensive and discretionary. Effectively, customers pay the company to cook for them. While that may be a justifiable expense in good times, when money is tight the company’s falling top line suggests it’s one of the first things to go. A difficult period, however, doesn’t mean the company’s business won’t survive and prosper in the future. In fact, NutriSystem has been around for over 40 years, so it has seen its share of hard times.
This country’s increasing tendency toward unhealthy lifestyles (notably including eating habits) suggests that there is a clear market for NutriSystem’s offering. As baby boomers crest into retirement, such meal replacement plans could see a strong boost as medical practitioners push patients to shed pounds and stay out of hospitals.
The shares recently had an 8% dividend yield. That may not be sustainable if results don’t improve soon. So an investment here is only appropriate for more aggressive income investors seeking a play on America’s expanding waist line.
GameStop Corp. (NYSE:GME)
GameStop Corp. (NYSE:GME) is the world leader in video game stores, with more than 6,500 stores in 15 countries. In early 2012 the company initiated a dividend. It increased the disbursement 10% earlier this year. With no long-term debt and a leading industry position, this would seem like a great company to own.
That said, GameStop Corp. (NYSE:GME) faces some notable challenges. For example, it depends heavily on the purchase and sale of used games. While a stable business today, game and console makers are both looking to deliver games over the Internet. This could materially hamper the used game market. However, it could also put GameStop Corp. (NYSE:GME)’s new game sales into a tailspin. And this trend can’t be stopped.
GameStop is taking action, working to broaden its own digital platforms. So it has the potential to survive this threat. However it is likely to be a vastly different company than it is today if it does survive. All but the most aggressive investors should stay on the sidelines.
No Debt Dividends
It’s interesting to see how many companies pay dividends and have no debt. It is a great starting point for building a bulletproof portfolio. Conservative investors should take a look at The CheeseCake Factory Incorporated (NASDAQ:CAKE), while more aggressive types might consider NutriSystem.
The article Dividend Payers With No Debt originally appeared on Fool.com and is written by Reuben Gregg Brewer.
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