Strong Companies That Can Make the Payout

One of the strategies I have seen emerging amidst the recent market declines is concentrating on dividend-paying stocks. The theory is that collecting dividends smoothes volatility and allows investors to get paid while they wait for the market to recover.

I tend to agree, as a dividend is an assured return -- something very hard to come by in today's financial world. Treasuries pay no yield worth mentioning, corporate binds are far too risky and there are still a lot of questions about the safety of many municipal issues. While dividends can be cut or eliminated, as we have seen countless times in the last few months, a financially healthy company with a good dividend yield makes sense in the current environment.

It makes even more sense to me to add Tim's favorite criteria -- no debt on the balance sheet -- and find those financially strong companies that can continue to make shareholder payouts. Adding criteria for profitability so that large losses would not lead to dividend cuts, I came up with some interesting names.

A name that leaped off the list is a company I wrote about earlier this year. Ituran Location & Control (ITRN - commentary - Cramer's Take) is an Israeli company in the stolen vehicle recovery and fleet management business. Its products help locate, recover and return stolen vehicles, while its fleet management software allows companies to track their vehicles at all times and better manage fleet usage and expenses.

Although weak economies in Europe and the U.S. may slow growth, the company is well positioned in the Brazilian market, a key growth driver in the next few years as the nation recently passed legislation requiring location devices in all models manufactured in 2009 and onward. Ituran is already a market leader in Brazil and should benefit from the new laws.

The company recently reported a strong quarter, with revenues up 28% and operating profits up 60%. Netting out currency gains, operating profits were still up better than 35%, and the subscriber base grew 16% year over year. The company is in a solid position with $57 million in net cash, and has been returning cash to shareholders in the form of dividends and stock buybacks. With an EV/EBITDA ratio of just 3 and a P/E of 9, this stock appears cheap.

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At the time of publication, Melvin had no positions in the stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.