Facebook, Google and 14 More S&P 500 Companies That Could Initiate a Dividend Soon

Which companies have the ability to initiate a dividend?

There are 16 companies in the S&P 500 that have room to do so, according to Bank of America/Merrill Lynch, the investment banking arm of Bank of America.

Recently Bank of America/Merrill Lynch generated 20 stock screens for investors to peruse, including high-quality cash-rich stocks for investors to consider.

"Our themes include large-caps over small-caps, high quality over low quality, liquidity over leverage and sustainable/growing dividends over high dividend yield," the analysts wrote in an April 29 note to clients.

BofA/Merrill Lynch found 16 companies in the S&P 500 that could initiate a dividend, based on the following criteria:

  • Low debt vs. the industry in which it operates (based on net debt/net operating profit after taxes vs. the median for the respective industry);
  • Cash as a percentage of market cap that is at least 2%;
  • Stable earnings trends based on positive earnings-per-share growth in the prior fiscal year and expectations for the current year; and
  • No significant profit acceleration anticipated.

The criteria exclude stocks in the financial services sector. The metrics are as of March 31.

BofA/Merrill Lynch cautions that the screens are not recommended lists, either individually or as group of stocks, and that investors should consider the fundamentals of each company as well as their own individual investment objectives before making any investment decisions.

With that said, here is the list of 16 stocks with room for a dividend, according to BofA. If the stock is covered by BofA/Merrill Lynch equity analysts, we've included a snippet of their investment thesis. 

1. Adobe Systems
1. Adobe Systems

Adobe Systems' (ADBE - Get Report) net debt to net operating profit after taxes, or NOPAT, is -2.6x compared to the software industry's median of -1.1x, while its cash as a percentage of market cap is 8.7%, BofA/Merrill Lynch said.

Adobe's prior-year EPS growth was 134%. The consensus on its current fiscal year EPS growth is 33.2%, according to the report.

BofA/Merrill Lynch analyst Kash Rangan rates the company at buy, with a $109 price objective. "ADBE is one of our top picks for CY16 from our Year Ahead report, benefiting from the BoB (best of both worlds of growth and margin expansion) theme," Rangan wrote in a March 23 note to clients.

2. Centene
2. Centene

Centene's (CNC - Get Report) net debt to net operating profit after taxes, or NOPAT, is -1.9x compared to the health care providers and services median of 3.7x, while its cash as a percentage of market cap is 26.1%, BofA/Merrill Lynch said.

Centene's prior-year EPS growth was 29.6%. The consensus on its current fiscal year EPS growth is 39.6%, according to the report.

BofA/Merrill Lynch analyst Kevin Fischbeck rates the company at buy, with a $93 price objective. "Our $93 price objective represents a 17.8x P/E on our 2017E EPS," Fischbeck wrote in an April 26 note to clients. "This is in line with CNC's forward P/E multiple average over the past five years. Upside risks to our price objective are better than expected enrollment growth, lower than expected medical costs and better than expected synergy realization. Downside risks to our PO are lower than expected enrollment growth, higher than expected medical costs, the HNT acquisition not closing and the potential for integration issues."

3. Cognizant Technology Solutions
3. Cognizant Technology Solutions

Cognizant Technology Solutions' (CTSH - Get Report) net debt to net operating profit after taxes, or NOPAT, is -2.2x compared to the median of 1.1x for the IT services industry, while its cash as a percentage of market cap is 13%, BofA/Merrill Lynch said.

Cognizant's prior-year EPS growth was 12.8%. The consensus on its current fiscal year EPS growth is 10.4%, according to the report.

BofA/Merrill Lynch analyst Sara Gubins rates the company at buy, with a $70 price objective. "We continue to believe the adoption of newer service lines (e.g., social, mobile, analytics and cloud) will drive strong growth as Cognizant cycles past the merger-related revenue drag in its health care end market and a weak start to 2016 in financial services," Gubins wrote in a May 6 note to clients. "Shares are attractive, in our view, trading at 15x 2017E EPS versus a five-year historical median of 18x. We base our $70 price objective on 18x our 2017E non-GAAP EPS."

4. Facebook
4. Facebook

Facebook's (FB - Get Report) net debt to net operating profit after taxes, or NOPAT, is -4.9x compared to the median of -0.4x for the Internet software and services industry, while its cash as a percentage of market cap is 5.7%, the BofA/Merrill Lynch report said.

Facebook's prior-year EPS growth was 17.3%. The consensus on its current fiscal year EPS growth is 37.7%, the report said.

BofA/Merrill Lynch analyst Justin Post rates the company at buy, with a $145 price objective. "FB's network effects were highlighted in a solid user and strong revenue quarter, and the company remains our top idea for the mobile Internet. With Instagram ($5bn+ opportunity) monetization still mostly ahead we think FB is in the best position in the sector to meet/beat expectations. Also, messaging is starting to roll out tools for monetization, while live videos should be a positive for usage and, eventually, revenues," Post wrote in an April 28 note to clients following quarterly earnings results. Post raised his price objective by $5 to $145.

Jim Cramer's Action Alerts PLUS portfolio owns shares of Facebook. Cramer and Research Director Jack Mohr said Wednesday of Facebook, Alphabet and Paypal:

These companies have the balance sheet capacity/cash to initiate a dividend, but all three (especially PayPal and Facebook) are still growing at tremendous rates and view their business (and, as a result, capital allocation decisions) through a five-to-10-year lens. Investments and acquisitions they made three to five years ago are paying off in spades today (think: Facebook and Google's investment in mobile, Facebook's acquisition of Instagram and WhatsApp, and PayPal's acquisition of Venmo/Braintree/Xoom as just a few examples).

Given the rapidly evolving nature of their respective industries, the companies realize they must constantly innovate and aggressively invest in new technology and products in order to retain leadership positions, capture share and stay ahead of the curve. They value growth investments, acquisitions and even buybacks -- all three of which can be deployed opportunistically -- over dividends which, once initiated, are effectively irrevocable (not to mention taxed twice).

For better or for worse, tech companies are defined by their growth, both by investors (higher multiple) and potential employees (companies investing in high growth areas attract the top talent). We love Apple, but its 2.5% dividend yield isn't helping its multiple or perception as a maturing tech company.

5. F5 Networks
5. F5 Networks

F5 Networks' (FFIV - Get Report) net debt to net operating profit after taxes, or NOPAT, is -2.2x compared to the median of 0 for the communications equipment industry, while its cash as a percentage of market cap is 10.9%, the BofA/Merrill Lynch report said.

F5 Neworks' prior-year EPS growth was 23%. The consensus on its current fiscal year EPS growth is 5.3%, the report said.

BofA/Merrill Lynch analyst Tal Liani rates the company at neutral, with a $117 price objective. "F5 is a key player in the network optimization space, with products that enable network managers to better utilize existing resources. The company maintains one of the better growth rates in the industry and one of the better margin structures (+80% GM and 36-37% OM). The company is expanding into new markets, but faces secular challenges in its core ADC market, limiting the upside to the shares," Liani wrote as part of his investment rationale for the stock in an April 21 note.

6. Alphabet (Class A and Class C)
6. Alphabet (Class A and Class C)

Alphabet's (GOOG - Get Report) (GOOGL - Get Report) net debt to net operating profit after taxes, or NOPAT, is -4.1x compared to the median of -0.4x for the Internet software and services industry. Cash as a percentage of market cap is 14.3% for the Class C shares and 13.9% for the Class A shares, the BofA/Merrill Lynch report said.

Alphabet's prior-year EPS growth was 13%. The consensus on its current fiscal year EPS growth is 17% for Class C shares and 16.6% for Class A shares, the report said.

BofA/Merrill Lynch analyst Justin Post rates the company's Class C shares at buy, with a $925 price objective.

"Google is well positioned long term with leading search technology, Android and YouTube," Post wrote in his investment rationale in an April 22 note. "Google is also an advertising industry leader and the company should generate incremental revenue growth from increasing mobile usage, video usage, Google Play activity, and connected device activity (including autos). We believe Google should trade at a premium to over the last 5 years, given shareholder friendly actions (buybacks and new disclosures) and new product catalysts."

Jim Cramer's Action Alerts PLUS portfolio owns Alphabet Class A shares. Cramer and Research Director Jack Mohr said Wednesday of Facebook, Alphabet and Paypal:

These companies have the balance sheet capacity/cash to initiate a dividend, but all three (especially PayPal and Facebook) are still growing at tremendous rates and view their business (and, as a result, capital allocation decisions) through a five-to-10-year lens. Investments and acquisitions they made three to five years ago are paying off in spades today (think: Facebook and Google's investment in mobile, Facebook's acquisition of Instagram and WhatsApp, and PayPal's acquisition of Venmo/Braintree/Xoom as just a few examples).

Given the rapidly evolving nature of their respective industries, the companies realize they must constantly innovate and aggressively invest in new technology and products in order to retain leadership positions, capture share and stay ahead of the curve. They value growth investments, acquisitions and even buybacks -- all three of which can be deployed opportunistically -- over dividends which, once initiated, are effectively irrevocable (not to mention taxed twice).

For better or for worse, tech companies are defined by their growth, both by investors (higher multiple) and potential employees (companies investing in high growth areas attract the top talent). We love Apple, but its 2.5% dividend yield isn't helping its multiple or perception as a maturing tech company.

7. Illumina
7. Illumina

Illumina's (ILMN - Get Report) net debt to net operating profit after taxes, or NOPAT, is -0.6x compared to the median of -0.4x for the life sciences tools and services industry. Cash as a percentage of market cap is 5.8%, the BofA/Merrill Lynch report said.

Illumina's prior-year EPS growth was 30.8%. The consensus on its current fiscal year EPS growth is 8.7%, according to the report.

BofA/Merrill Lynch analyst Derik de Bruin rates the genetic sequencing company at neutral, and trimmed his price objective on May 4 to $170, down from $180 previously.

"We mostly agree with management in that we do not think the 1H delays are due to either a capacity air pocket or a change in market dynamics," the analyst wrote in the note following Illumina's quarterly earnings results. "However, we are cautious about the next few quarters as we think the sequencing market is transitioning away from an 'arms race' mentality, which could result in additional lumpy box demand. While it is too early to expect ILMN to give FY17 guidance, uncertainty over when ILMN will return to its high-teens to low-20% organic growth rate will likely overhang shares, especially since valuation already assumes to some extent that ILMN will eventually resume its prior high-growth trajectory. As such, we remain neutral on ILMN shares."

8. Intuitive Surgical
8. Intuitive Surgical

Intuitive Surgical's (ISRG - Get Report) net debt to net operating profit after taxes, or NOPAT, is -2.6x compared to the median of 1.7x for health care equipment and supplies industry. Cash as a percentage of market cap is 6.9%, the BofA/Merrill Lynch report said.

Intuitive Surgical's prior-year EPS growth was 39.9%. The consensus on its current fiscal year EPS growth is 7.2%, according to the report.

BofA/Merrill Lynch analyst Bob Hopkins rates the surgical robot maker at buy and raised his price objective on April 20 to $750 from $640 previously.

"Q1 was ISRG's strongest quarter in years with solid improvement in the three most critical leading indicators of long-term value creation -- procedure volume growth, gross margins and free cash flow," Hopkins wrote in a note following the company's first-quarter earnings results.

"We believe over time ISRG can deliver the kind of innovation necessary to drive robust procedure growth and assume ISRG's pipeline will deliver the type of clinical and economic value necessary to drive penetration across a broader range of surgical procedures," Hopkins wrote as part of his investment thesis on the stock. "Our conviction in ISRG's ability to gain meaningful share in the U.S. general surgery market makes us confident in its potential long-term recurring revenue opportunity of $7-8bn+."

9. Michael Kors
9. Michael Kors

Michael Kors' (KORS) net debt to net operating profit after taxes, or NOPAT, is -0.8x compared to the median of 0x for the apparel and luxury goods industry. Cash as a percentage of market cap is 6.8%, the BofA/Merrill Lynch report said.

Michael Kors' prior-year EPS growth was 32.9%. The consensus on its current fiscal year EPS growth is 3.3%, according to the report.

BofA/Merrill Lynch analyst Lorraine Hutchinson rates the handbag and accessories maker at neutral but raised her price objective on March 8 to $62 from $54 previously, reflecting a "higher peer multiple given the run in the group."

Still, the price objective is "based on 14x our F2017E EPS. This is a discount to accessible luxury peers, which trade at higher multiples on lower margins. We think this discount is warranted given high margins (25% vs. the peer average at 14%), recent comp deceleration, unproven geographic and menswear expansion strategies, and risk that new product assortments will fail to drive sustained comp turnaround. We remain neutral," Hutchinson wrote on March 8.

Michael Kors is expected to report quarterly earnings later this month.

10. Level 3 Communications
10. Level 3 Communications

Level 3 Communications' (LVLT) net debt to net operating profit after taxes, or NOPAT, is 2.5x compared to the median of 7.3x for the telecommunications industry. Cash as a percentage of market cap is 4.6%, the BofA/Merrill Lynch report said.

Level 3 Communications' prior-year EPS growth was 691.7%. The consensus on its current fiscal year EPS growth is 140.7%, according to the report.

BofA/Merrill Lynch analyst Michael Funk downgraded the company to neutral from buy on April 29. Funk has a price objective of $60 on the stock.

"Our buy thesis was based on expectations for reacceleration in revenue growth (which appears to have stalled), upside to synergies (largely realized and in valuation), and greater than projected FCF growth (still possible, but likely a 2017 story). We retain a constructive view with regard to Level 3 gaining market share in a larger addressable market post the acquisition of [TW Telecom] and as a possible strategic asset in a consolidating industry," Funk wrote in the note.

11. Monster Beverage
11. Monster Beverage

Monster Beverage's (MNST - Get Report) net debt to net operating profit after taxes, or NOPAT, is -5.3x compared to the median of 3.3x for the beverages industry. Cash as a percentage of market cap is 10.8%, the BofA/Merrill Lynch report said.

Monster Beverage's prior-year EPS growth was 2.5%. The consensus on its current fiscal year EPS growth is 28.7%, according to the report.

BofA/Merrill Lynch analyst Evan Morris rates Monster Beverage at neutral with a $155 price objective.

"Heading into the quarter our primary concern was the distributor changeover would lead to a sales and earnings shortfall. Results came in ahead of our expectations, driven by strong top-line trends, suggesting that much of the disruption seen over the past couple of quarters may be largely behind the company," Morris wrote in a May 2 note to clients. "In addition, MNST announced it intends to do a $2 billion Dutch-tender offer. The combination of the two, in addition to likely lower than expected investors' expectations heading into the print, drove the stock much higher on Friday. We continue to view MNST as one of the better growth stories in the industry and believe there are ample opportunities to increase scale internationally over the next few years. The stocks merited, but premium valuation keeps us at neutral."

12. PayPal
12. PayPal

PayPal's (PYPL - Get Report) net debt to net operating profit after taxes, or NOPAT, is -2.8x compared to the median of 1.1x for the IT services industry. Cash as a percentage of market cap is 10.8%, the BofA/Merrill Lynch report said.

PayPal's prior-year EPS growth was 203%. The consensus on its current fiscal year EPS growth is 15.5%, according to the report.

BofA/Merrill Lynch analyst Justin Post rates PayPal at neutral but raised his price objective by $4 to $44 on April 28.

"Overall, we like PayPal's [total payment volume] growth, margins, expense management and lack of focused competition across all platforms and devices, but are cautious on PayPal's gross profit growth and ability to maintain margins given take-rate pressure," Post wrote. "We are raising our PO from to $44 from $40 based on a higher 14x (vs. V and MA at 15-16x) our 2017E EBITDA of $3.4 billion due to a recent increase in comp multiples. Our PO would represent a premium P/E at 26x 2017E (1.5x P/E/G), vs. Visa  (V - Get Report) and MasterCard  (MA - Get Report) at 24-25x."

Jim Cramer's Action Alerts PLUS portfolio holds shares of PayPal and Visa. Regarding PayPal, Cramer and Research Director Jack Mohr said Wednesday of Facebook, Alphabet and Paypal:

These companies have the balance sheet capacity/cash to initiate a dividend, but all three (especially PayPal and Facebook) are still growing at tremendous rates and view their business (and, as a result, capital allocation decisions) through a five-to-10-year lens. Investments and acquisitions they made three to five years ago are paying off in spades today (think: Facebook and Google's investment in mobile, Facebook's acquisition of Instagram and WhatsApp, and PayPal's acquisition of Venmo/Braintree/Xoom as just a few examples).

Given the rapidly evolving nature of their respective industries, the companies realize they must constantly innovate and aggressively invest in new technology and products in order to retain leadership positions, capture share and stay ahead of the curve. They value growth investments, acquisitions and even buybacks -- all three of which can be deployed opportunistically -- over dividends which, once initiated, are effectively irrevocable (not to mention taxed twice).

For better or for worse, tech companies are defined by their growth, both by investors (higher multiple) and potential employees (companies investing in high growth areas attract the top talent). We love Apple, but its 2.5% dividend yield isn't helping its multiple or perception as a maturing tech company.

13. Red Hat
13. Red Hat

Red Hat's (RHT - Get Report) net debt to net operating profit after taxes, or NOPAT, is -2.2x compared to the median of 1.1x for the software industry. Cash as a percentage of market cap is 8.9%, the BofA/Merrill Lynch report said.

Red Hat's prior-year EPS growth was 12.6%. The consensus on its current fiscal year EPS growth is 16.3%, according to the report.

BofA/Merrill Lynch analyst Kash Rangan rates Red Hat at neutral with a $78 price objective.

"RHT has executed well in the face of long-term secular shifts, including operating system and middleware disintermediation by the nascent containers and cloud respectively. We are taking the [long term] view, and believe that it might be difficult for Red Hat to maintain 20%+ growth in the face of those secular shifts in software," Rangan wrote on March 23. "As the UNIX to Linux opportunity has diminished, RHT has put together several businesses that synergistically are pulling in business amongst each other, has built a $100mn cloud run rate business (5% of total revs, -$50mn billings impact in FY16 or -2% y/y), and is benefiting from more new workloads going to Linux vs. Windows."

"We believe that the stock achieving high end of historical 25x FCF multiple will be hampered by secular concern, and believe below middle of the range multiple is more appropriate due to billings deceleration in Q4," Rangan added.

14. Urban Outfitters
14. Urban Outfitters

Urban Outfitters' (URBN - Get Report) net debt to net operating profit after taxes, or NOPAT, is -0.8x compared to the median of 1x for the specialty retail industry. Cash as a percentage of market cap is 8.4%, the BofA/Merrill Lynch report said.

Urban Outfitters' prior-year EPS growth was 6%. The consensus on its current fiscal year EPS growth is 8.2%, according to the report.

BofA/Merrill Lynch analyst Lorraine Hutchinson rates Urban Outfitters at buy with a $40 price objective.

"Urban is one of the most appealing growth stories in specialty retail, in our opinion. Its three proven concepts each have significant room for substantial expansion and its product is differentiated and compelling," Hutchinson wrote as part of her investment thesis on April 26. "A recovery in sales productivity levels at key brands and improving operating margins provide significant near-term earnings growth potential. Longer-term, square footage growth and an increasing penetration of e-commerce sales should drive earnings higher."

Urban Outfitters reports quarterly earnings on May 18.

15. Varian Medical Systems
15. Varian Medical Systems

Varian Medical Systems' (VAR - Get Report) net debt to net operating profit after taxes, or NOPAT, is -0.5x compared to the median of 1.7x for the health care equipment and supplies industry. Cash as a percentage of market cap is 12.4%, the BofA/Merrill Lynch report said.

Varian Medical's prior-year EPS growth was 6.8%. The consensus on its current fiscal year EPS growth is 6.3%, according to the report.

BofA/Merrill Lynch does not cover Varian Medical.

16. Waters
16. Waters

Waters' (WAT - Get Report) net debt to net operating profit after taxes, or NOPAT, is -1.5x compared to the median of -0.4x for the life sciences tools and services industry. Cash as a percentage of market cap is 22.3%, the BofA/Merrill Lynch report said.

Waters' prior-year EPS growth was 11.4%. The consensus on its current fiscal year EPS growth is 6.6%, according to the report.

BofA/Merrill Lynch analyst Derik de Bruin rates the company at neutral and has a $140 price objective on Waters.

"Overall, Q1 was modestly ahead of expectations, while FY16 EPS guidance was increased chiefly due to waning F/X headwinds," de Bruin wrote on April 26 following the company's quarterly results. "We reiterate our neutral rating, as the better organic revenue growth yielded only limited operating leverage, shares already reflect expectations of continuing [mid-single digit] organic growth, and worries that Pharma (~60% of Waters div. sales) spending will moderate may make it difficult for shares to outperform."

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