Little or No Debt

I n such volatile times, we believe that businesses that are operating with little or no debt provide an extra measure of security and, all things being equal, are among the companies that are most appropriate for your core holdings. Such an indicator of financial strength enables the company to weather various economic situations, and puts it in position to obtain favorable financing should an expansion opportunity arise. In addition, any increase in earnings will hit the bottom line faster than it would if the company were saddled with debt. Next, we considered earnings and dividend growth. We favored companies that have demonstrated good earnings and dividend growth rates of at least 3.2%, which is the long-term inflation rate. As usual, our effort was to include companies that have histories of being able to survive and prosper over the long haul. The companies that qualified for this month’s portfolio have displayed the financial and managerial capability to compete effectively. It is not surprising that these companies turn out to be the major players in their respective industries.

Take for example, Tidewater Inc. The company provides water transportation for the petroleum industry. It has just $300 million in total debt (13% of capitalization), with $250 million in cash assets. TDW earned $7.89 per share for the fiscal year ended March 31. Profit margins were over 29%, return on equity was 19%, book value stood at $43.77 per share, and the price/earnings ratio is under 6! Also, its board has authorized the repurchase of up to $200 million worth of common stock. The repurchase program will end on or before June 30, 2010. TDW has bought back a total of $516.2 million in shares since August 2005. It owns 404 vessels, the largest fleet of vessels serving the global offshore energy industry.

Boston Beer is an interesting choice. It pays no dividend, has no debt, no preferred stock, and no pension liability. SAM is America’s largest craft brewer and the 4th largest overall, having generated almost $400 million in sales in 2008. Despite that, it accounts for less than 1% of American beer sold. It brews all of its Sam Adams products from just four facilities in Ohio, Oregon, New York, and the newly completed Pennsylvania brewery. Its beer can be found in just about every part of the United States. Sam Adams has won more awards in international beer-tasting competitions over the last five years than any other brewery in the world. Company Chairman and founder Jim Koch uses the same recipe and processes that his great-great grandfather used in the mid-1800s.