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.
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.