We recently published a list of 7 Best Debt Free Dividend Stocks To Buy. In this article, we are going to take a look at where Cal-Maine Foods, Inc. (NASDAQ:CALM) stands against the other debt free dividend stocks.

Debt financing isn’t always a bad thing; its effect depends on how companies use it. When managed well, it can generate significant cash flow and boost shareholder returns. However, if misused, debt can harm a company’s overall financial health. Though investor sentiment this year is being boosted by expected interest rate cuts from the Federal Reserve, which is also contributing to this year’s stock market rally, companies in the US still carry excessively high levels of debt on their balance sheets. According to a report by S&P Global Ratings, corporate debt defaults surged last year and could pose challenges again in 2024 as companies with limited cash struggle with high interest rates. In 2023, 153 companies failed to meet their debt payment obligations, a significant increase from 85 in the previous year, representing an 80% rise. This marked the highest default rate in seven years, excluding the spike related to COVID-19 in 2020.

While many U.S. companies have strong balance sheets, a significant portion of the defaults came from low-rated companies with negative cash flows, heavy debt burdens, and weak liquidity. Analysts refer to these heavily indebted companies as “zombies,” as they struggle to survive, barely managing to pay the interest on their loans, and are often one setback away from failure. An Associated Press analysis revealed that the number of such companies has surged to nearly 7,000 publicly traded firms worldwide, including 2,000 in the United States. These companies have been affected by years of accumulating cheap debt, followed by persistent inflation that has driven borrowing costs to their highest levels in a decade. Moreover, zombie debt was frequently not used for expansion, hiring, or investing in technology, but rather for repurchasing their own stock.

Read Also: 10 Highest Paying Monthly Dividend Stocks

Financial experts indicate that US companies had an opportunity to reduce their debt obligations following then-President Donald Trump’s 2017 tax overhaul, which lowered corporate tax rates and facilitated the repatriation of overseas profits. However, most of this financial benefit was used for stock buybacks rather than addressing debt. As a result, the situation has deteriorated to the point where the government is projected to spend $870 billion this year just on interest payments on its debt, an increase of one-third from the previous year and more than the defense budget.

Even with the tax overhaul, debt wasn’t going to disappear on its own. According to the Federal Reserve, corporate America held a $13.7 trillion debt load in 2023. Company debt has increased by 18.3% since 2020, as businesses capitalized on the Fed’s interest rate cuts during the early days of the COVID-19 pandemic. Moreover, according to a report by the Wall Street Journal, US companies will need to renegotiate approximately $1.87 trillion in corporate debt over the next few years, facing higher interest rates. This will largely depend on their sales forecasts for the coming months and years, as companies will negotiate to secure the most favorable interest rates possible.

Debt is generally not seen as a favorable option for supporting dividends. This was particularly evident during the 2020 pandemic when many private companies resorted to dividend recapitalization—taking on new debt to fund dividend payments. This practice remains common among private equity-backed firms after the pandemic as well. In the first half of 2024, dividend recapitalizations have surged, with about $30.2 billion in leveraged loans issued to cover these payments, matching the amount seen in 2021, which was the highest in at least a decade, according to PitchBook LCD data.

That said, corporate balance sheets are currently strong, with companies worldwide distributing record dividends to shareholders. In this article, we will discuss some of the best debt free dividend stocks that pay dividends.

We also measured hedge fund sentiment around each stock according to Insider Monkey’s database of 912 funds as of Q2 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

A close-up of an organic egg being carefully washed and inspected before being packaged.

Cal-Maine Foods, Inc. (NASDAQ:CALM)

Dividend Yield as of August 16: 2.67%

Market Cap as of August 16: $3.47 billion 

Enterprise Value as of August 16: $2.66 billion 

Cal-Maine Foods, Inc. (NASDAQ:CALM) is the largest producer and distributor of fresh shell eggs in the US. The company’s operations faced mild disruptions due to highly pathogenic avian influenza (HPAI). Despite these challenges, they successfully fulfilled customer demands. Over the year, the company stayed committed to its growth strategy, providing a product mix that aligned with customer needs. The operations were performed efficiently, and a strong focus was maintained on achieving operational excellence. Since the start of 2024, the stock returned 24.8% and its 12-month returns came in at over 48%.

Cal-Maine Foods, Inc. (NASDAQ:CALM)’s strong performance is evident in the completion of two asset acquisitions during fiscal 2024, with an additional acquisition finalized after the fiscal year ended. Each acquisition aligns with the company’s organic growth initiatives. The company is enthusiastic about the new assets, including those of Fassio Egg Farms, Inc. in Erda, Utah, and the former broiler processing plant, hatchery, and feed mill in Dexter, Missouri, previously operated by Tyson Foods. The demand for the company’s products is evident through the recent acquisitions it has made. Diamond Hill Capital also highlighted this in its Q3 2023 investor letter. Here is what the firm has to say:

Cal-Maine Foods, Inc. (NASDAQ:CALM) has been paying variable dividends since the third quarter of 2008. Though its dividend policy remained unstable during the years following the pandemic, it still got back on its feet with its payouts. In the most recent quarter, it returned $37.8 million to shareholders through dividends. Currently, it pays a quarterly dividend of $0.77 per share and has a dividend yield of 2.67%, as of August 16.

At the end of June 2024, 25 hedge funds owned stakes in Cal-Maine Foods, Inc. (NASDAQ:CALM), up from 24 in the previous quarter, as per Insider Monkey’s database. These stakes have a total value of nearly $260 million. With over 2.1 million shares, Renaissance Technologies was the company’s leading stakeholder in Q2.

Overall, CALM ranks 5th on our list of the best debt free dividend stocks to buy. While we acknowledge the potential of CALM as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than CALM but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.

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Disclosure: None. This article is originally published at Insider Monkey.