How to Analyze Dividend Stocks Using Levered Free Cash Flow

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 |  Includes: AZN, BPL, CTL, DPM, LO, MO, NOK, SPH, T, VZ
by: Mycroft

This week I introduced my “back of the envelope” method of analyzing stocks using levered free cash flow and I was very pleased that it got such a positive response from Seeking Alpha’s readership. For those of you who may have missed it, please click here for an introduction to what I will discuss in this article.

As I demonstrated in that article and in the one that followed (analyzing Warren Buffett’s Berkshire Hathaway’s (NYSE:BRK.A) portfolio stock sales), basically anyone can analyze a stock in about a minute and do so for free using Yahoo (NASDAQ:YHOO) Finance’s “Key Statistics” section.

Since interest rates are rising and municipal bonds are starting to get risky, (with many states and municipalities in terrible financial shape), I am finding that the income investors are hunting vigorously for high yield as they know that -- sooner or later -- they are going to have to sell their bonds, because as interest rates start to rise, the principal of their existing bond holdings are going to go down. Thus they are moving out of bonds and locking in dividend yields on stocks that are becoming more and more popular every day. Therefore, with the real estate market dead and the principal on one’s bonds at great risk, the only place for them to go is in high dividend yielding stocks and MLPs (Master Limited Partnerships).

The following are not recommendations, but are examples of stocks with high dividend yields that I have analyzed using Yahoo Finance’s “Key Statistics” section with my levered free cash flow method. I have done so in order that each of you can practice and see if you get the same results that I get. Remember, the lower the price to owner earnings the better; also, I like to buy at less than 15 and sell at 30 times price to owner earnings. My 60 year back-test of the DJIA from 1950-2009 (available here) is more than enough proof as to the validity of my “back of the envelope” method. If that doesn’t convince you, then knowing that Warren Buffett introduced levered free cash flow to the world in 1986 should be enough to tweak your interest.

One final point before I give you my 10 examples: Please also check out the payout ratio for each stock; if you find that they pay out more in dividends per share than they produce in earnings per share, then they are borrowing money to keep you as a shareholder ... and that is not good.

Here is the list:

AT&T (NYSE:T)

Dividend Yield = 6.10%

Levered Free Cash Flow = $8.87 Billion

Shares Outstanding = 5.91 Billion

Owner Earnings per share = $8.87/5.91 = $1.50

2/16/2011 closing price = $28.30

Price to Owner Earnings = $28.30/$1.50 = 18.86

Verizon (NYSE:VZ)

Dividend Yield = 5.4%

Levered Free Cash Flow = $13.62 Billion

Shares Outstanding = 2.82 Billion

Owner Earnings per share = 13.62/2.82 = $4.82

2/16/2011 closing price = $36.17

Price to Owner Earnings = $36.17/$4.82 = 7.50

Astra Zeneca (NYSE:AZN)

Dividend Yield = 7.7%

Levered Free Cash Flow = $8.73 Billion

Shares Outstanding = 1.40 Billion

Owner Earnings per share = $8.73 /1.40 = $6.24

2/16/2011 closing price = $49.17

Price to Owner Earnings = $49.17/$6.24 = 7.87

Altria (NYSE:MO)

Dividend Yield = 4.1%

Levered Free Cash Flow = $3.55 Billion

Shares Outstanding = 2.09 Billion

Owner Earnings per share =$3.55/2.09 = $1.69

2/16/2011 closing price = $24.48

Price to Owner Earnings = $24.48/$1.69 =14.49

Suburban Propane (NYSE:SPH)

Dividend Yield = 6.00%

Levered Free Cash Flow = $ 98.81 Million

Shares Outstanding = 35.40 Million

Owner Earnings per share = $98.81/35.40 = $2.79

2/16/2011 closing price = $57.76

Price to Owner Earnings = $57.76/$2.79 = 20.70

CenturyLink (NYSE:CTL)

Dividend Yield = 6.60%

Levered Free Cash Flow = $1.38 Billion

Shares Outstanding = 303.25 Million

Owner Earnings per share = $1380/303.25 = $4.55

2/16/2011 closing price = $42.66

Price to Owner Earnings = $42.66/$4.55 = 9.37

Lorillard (NYSE:LO)

Dividend Yield = 6.00%

Levered Free Cash Flow = $1.16 Billion

Shares Outstanding = 149.61 Million

Owner Earnings per share = $1160/149.61 = $7.75

2/16/2011 closing price = $77.84

Price to Owner Earnings = $77.84/$7.75 = 10.04

Nokia (NYSE:NOK)

Dividend Yield = 4.20%

Levered Free Cash Flow = $6.88 Billion

Shares Outstanding = 3.71 Billion

Owner Earnings per share =$6.88/3.71 = $1.85

2/16/2011 closing price = $9.10

Price to Owner Earnings = $9.10/$1.85 = 4.91

Buckeye Partners (NYSE:BPL)

Dividend Yield = 6.00%

Levered Free Cash Flow = $89.89 Million

Shares Outstanding = 51.55 Million

Owner Earnings per share =$89.89/51.55 = $1.74

2/16/2011 closing price = $64.50

Price to Owner Earnings = $64.50/$1.74 =37.06

DCP Midstream Partners (NYSE:DPM)

Dividend Yield = 5.90%

Levered Free Cash Flow = (minus) $11.07 Million

Shares Outstanding = 37.60 Million

Owner Earnings per share = -11.07/37.60 = -$0.29

2/16/2011 closing price = $41.40

Price to Owner Earnings = $41.40/-$0.29 = -142.75

So there you have it. I have given you 10 examples of stocks paying out excellent dividend yields, but not all necessarily good companies. Just because a stock pays a great dividend does not make it a good investment. Many income investors do little research at all and just invest based on a company’s high yield, at their own peril. MLPs can also be dangerous if you don’t know the numbers behind the strong yield. I know many small investors in their retirement years that were put in dangerous MLPs, stocks and REITs, just for their yields, by their brokers -- and they lost a ton of money when the crash of 2008-2009 hit. So I wrote this article to give you this tool and let you use it to double check what your broker or advisor has put you in. As President Reagan used to say: “Trust but verify."

Disclaimer: Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyones work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and weeat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of PeterMycroftPsaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.

Disclosure: I am long NOK, CTL.