Free cash flow (FCF)—or owner earnings, as referred to by the legendary investor Warren Buffett—represents the cash available to shareholders after all other claims have been met. Based on FCF, a good measure of the fundamental strength of a company is its FCF yield, which is calculated by dividing a company’s FCF per share by its current market price per share. A positive FCF yield means the company earns more cash than needed for operations, which then can be used to fund growth, innovate, downsize debt, pay and grow dividends, or fund share buybacks.
While past performance may not necessarily replicate in the future, a few growth stocks with dividend yields exceeding 2.0% currently appear undervalued by their FCF. Here is a closer look at five dividend stocks with FCF yields at or above 6.7% (which is equivalent to a price-to-FCF at or below 15) and past and forward long-term EPS CAGR of at least 5%.
KLA-Tencor Corporation (NASDAQ:KLAC)
KLA-Tencor Corporation (NASDAQ:KLAC), a leader in process control and yield management solutions for the semiconductor industry, has a FCF yield of 7.0%. Last year, the company generated some $650.5 million or $3.86 per share in FCF. Its valuation based on earnings multiples is also attractive, as KLA-Tencor Corporation (NASDAQ:KLAC) trades at 13.6x trailing and 14.3x forward earnings, well below earnings multiples of its peers as a group. The company’s financial performance has been hurt by a slowing PC industry and lackluster economic growth weighing on the semiconductor manufacturing equipment sales, even though robust mobile device sales have supported growth.
KLA-Tencor Corporation (NASDAQ:KLAC) reported first-quarter revenues and EPS above analyst expectations, despite the plunge in both metrics. However, the company missed analysts’ projections for the current-quarter EPS. KLA-Tencor Corporation (NASDAQ:KLAC)’s weaker outlook for the whole year is based on a projected decline in chip companies’ capex of close to 10% compared to the year earlier. Analysts are more upbeat about KLA-Tencor Corporation (NASDAQ:KLAC)’s long-term outlook, forecasting an EPS CAGR of 10%. KLA-Tencor Corporation (NASDAQ:KLAC) has a dividend yield of 2.9%, payout ratio of 42% of last year’s FCF, and five-year annualized dividend growth rate of 22.9%.
Belo Corp (NYSE:BLC)
Belo Corp (NYSE:BLC), an operator of TV stations affiliated with ABC, CBS, NBC, FOX, and CW, has a FCF yield of 9.5%. The company generated nearly $112 million or $1.08 per share in FCF last year, which was more than double the amount in the previous year. The company is one of the largest pure-play television broadcasters, reaching 14.6% of U.S. television households in 15 high-growth markets. The company saw a total revenue growth of close to 3% in the first quarter, and topped analyst estimates of the quarterly EPS.