5 Stocks That Are Debt-Free and Paying Big

An 18% dividend yield is a warning sign, generally. It might mean investors have little confidence in a company's ability to preserve its share price and keep making payments. Often, debt adds to the anxiety. USA Today publisher Gannett (GCI) pays 18%, but has sinking sales and profits and carries long-term debt of nearly double its stock market value. Capstead Mortgage (CMO) pays 21%. Its business of borrowing cheap to hold government-sponsored mortgage debt isn't as risky as it sounds, unless financing dries up — something investors are clearly worried about.

Biovail (BVF) yields 18% and owes nothing. It, too, has warts. But maybe the stock has gotten cheap enough to make up for them.

Ontario-based Biovail, Canada's largest traded drug company, has focused since the mid-1990s on making alternative versions of existing drugs. Its biggest hit: Wellbutrin XL, an extended-release version of GlaxoSmithKline's (GSK) anti-depressant. Global sales of the drug approached $1.5 billion in 2006, generating revenue for Biovail that year of $450 million. The company's total sales topped $1 billion that year.

But the thinning development pipelines of big drug makers have given Biovail less to work with. Wellbutrin XL has faced generic competition since late 2006. Ultram ER, a once-daily pain pill released in 2006, hasn't caught on as quickly as hoped. Demand for Zovirax, a herpes cream, and Cardizem LA, a pill for high blood pressure, is cooling, too. Companywide sales are on pace to shrink to $748 million this year and $695 million next year. Shares, which multiplied in price from 50 cents in 1994 to more than $50 in 2001, have since fallen below $9.

Management has a plan. If drug makers aren't coming up with new blockbusters, and the generics business is becoming too competitive, Biovail will focus on developing its own drugs in an underserved niche. That niche is diseases of the central nervous system. These include dementias like Alzheimer's, movement disorders like Parkinson's, and peripheral nerve disorders like multiple sclerosis. Analysts reckon the world-wide market for CNS drugs tops $20 billion.

Biovail has boosted its research spending from a historic range of 8% to 12% of sales to around 14% of sales in its pursuit of new drugs. It has also shopped. In September it paid $100 million for Prestwick Pharmaceuticals, and last month it launched Prestwick's Xenazine pills for Huntington's disease, a neuro-disorder. But a drug developer is inherently riskier than one that simply reformulates others' drugs, and analysts say it might be 2010 before Biovail's sales start growing again.

Another negative: Biovail in recent years has been the source of far too much drama for most investors' taste. It has been sued by shareholders and regulators for alleged misdeeds ranging from being too chipper about trial drugs to massaging financial results to meet earnings expectations. Over the past year, though, the company announced a string of settlements, satisfying the Securities and Exchange Commission, the U.S. Department of Justice, a big shareholder group and others.

Biovail is still plenty profitable. A drop of 50 cents per share in profit this year and another foreseen for next year of 24 cents will leave 2009 profit of $1.13 a share. That puts the stock at less than eight times earnings. But investors have their pick of low-P/E stocks about now, and forecast earnings are worth less when past ones have fallen under even a whiff of suspicion. Dividends are different, though. If investors can rely on pocketing 18% for a few years, shares are surely cheap enough. The company can afford the payments. Even with dwindling drug sales, it will clear enough free cash. It seems committed to the dividend. Biovail made its latest payment announcement on Nov. 6. But management has said it would re-evaluate the dividend policy if presented with an attractive acquisition opportunity. Those appear all too frequently when you're looking for one. I hope management sticks with the dividend. I can think of few investments that would reward investors as richly at the moment as cash in the pocket, particularly from a company that's working to regain trust.

For more debt-free companies with big dividends, if not quite double-digit ones, have a look at the list below, created using SmartMoney's stock screener.