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Here we offer an alternative to the widely used Price to Free Cash Flow ratio: Levered Free Cash Flow to Enterprise Value.

P/FCF is a very helpful ratio for comparing the price of companies, however there are some drawbacks. Using market cap in the numerator limits comparisons to companies with similar capital structures, and using free cash flow ignores financing costs.

For these reasons, we use a ratio of levered free cash flow to enterprise value. Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm’s value from all ownership sources: market cap, outstanding debt, and preferred shares (i.e. the theoretical takeover value).


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From this value we subtract cash holdings because, in the event of a takeover, that cash would be used towards the takeover price.

For this article, we screened for high-yield stocks (with dividend yield between 4-7%) that had high amounts of levered free cash flow relative to enterprise value, possibly indicating that the firm is undervalued.

We also created a price-weighted index of the stocks mentioned below (click to enlarge), and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.



Do you think these companies could be takeover targets? Use this list as a starting-off point for your own analysis.

List sorted by levered free cash flow to enterprise value:

1. Icahn Enterprises, L.P. (NASDAQ:IEP): Property Management Industry. Market cap of $3.41B. Dividend yield at 4.97%. Levered free cash flow / enterprise value at 28.57% (levered free cash flow at $2.26B and enterprise value at $7.91B). The stock has gained 23.87% over the last year.

2. Nokia Corporation (NYSE:NOK): Communication Equipment Industry. Market cap of $32.64B. Dividend yield at 6.35%. Levered free cash flow / enterprise value at 21.31% (levered free cash flow at $4.71B and enterprise value at $22.10B). The stock appears to have good liquidity to back up its dividend -- current ratio at 1.65 and quick ratio at 1.49. The stock has lost 10.61% over the last year.

3. AstraZeneca PLC (NYSE:AZN): Drug Manufacturers Industry. Market cap of $71.51B. Dividend yield at 4.93%. Levered free cash flow / enterprise value at 12.03% (levered free cash flow at $8.46B and enterprise value at $70.35B). The stock appears to have good liquidity to back up its dividend -- current ratio at 1.5 and quick ratio at 1.4. The stock has gained 28.93% over the last year.

4. China Mobile Limited (NYSE:CHL): Wireless Communications Industry. Market cap of $179.56B. Dividend yield at 4.33%. Levered free cash flow / enterprise value at 11.3% (levered free cash flow at $15.80B and enterprise value at $139.82B). The stock appears to have good liquidity to back up its dividend --dividend yield at 4.33%, current ratio at 1.26, and quick ratio at 1.24. The stock has lost 2.01% over the last year.

5. Telecom Argentina S A (NYSE:TEO):
Diversified Communication Services Industry. Market cap of $4.89B. Dividend yield at 6.49%. Levered free cash flow / enterprise value at 10.53% (levered free cash flow at $470.72M and enterprise value at $4.47B). The stock has had a good month, gaining 11.15%.

6. GlaxoSmithKline plc (NYSE:GSK): Drug Manufacturers Industry. Market cap of $111.92B. Dividend yield at 4.73%. Levered free cash flow / enterprise value at 10.42% (levered free cash flow at $12.85B and enterprise value at $123.31B). The stock has gained 32.62% over the last year.

7. Telefonos de Mexico, S.A.B. de C.V. (NYSE:TMX): Long Distance Carriers Industry. Market cap of $17.08B. Dividend yield at 4.45%. Levered free cash flow / enterprise value at 10.08% (levered free cash flow at $2.27B and enterprise value at $22.52B). The stock has had a couple of great days, gaining 5.09% over the last week.

8. Merck & Co. Inc. (NYSE:MRK): Drug Manufacturers Industry. Market cap of $115.99B. Dividend yield at 4.04%. Levered free cash flow / enterprise value at 9.88% (levered free cash flow at $11.94B and enterprise value at $120.81B). The stock appears to have good liquidity to back up its dividend -- current ratio at 1.98 and quick ratio at 1.59. The stock has had a good month, gaining 10.76%.

9. Pitney Bowes Inc. (NYSE:PBI):
Business Equipment Industry. Market cap of $5.02B. Dividend yield at 6.01%. Levered free cash flow / enterprise value at 9.48% (levered free cash flow at $817.07M and enterprise value at $8.62B). The stock is a short squeeze candidate, with a short float at 10.14% (equivalent to 9.21 days of average volume). The stock has gained 15.36% over the last year.

10. Bristol-Myers Squibb Company (NYSE:BMY): Drug Manufacturers Industry. Market cap of $49.23B. Dividend yield at 4.57%. Levered free cash flow / enterprise value at 9.05% (levered free cash flow at $4.33B and enterprise value at $47.87B). The stock appears to have good liquidity to back up its dividend -- current ratio at 1.97 and quick ratio at 1.77. The stock has gained 27.87% over the last year.

11. VimpelCom Ltd. (NASDAQ:VIP): Wireless Communications Industry. Market cap of $18.26B. Dividend yield at 4.28%. Levered free cash flow / enterprise value at 8.3% (levered free cash flow at $1.90B and enterprise value at $22.88B). The stock might be undervalued at current levels, with a PEG ratio at 0.66, and P/FCF ratio at 13.68. The stock has lost 7.28% over the last year.

12. Verizon Communications Inc. (NYSE:VZ): Telecom Services Industry. Market cap of $104.93B. Dividend yield at 5.26%. Levered free cash flow / enterprise value at 8.26% (levered free cash flow at $12.50B and enterprise value at $151.40B). The stock has gained 37.93% over the last year.

13. Philippine Long Distance Telephone Co. (NYSE:PHI):
Telecom Services Industry. Market cap of $10.48B. Dividend yield at 6.38%. Levered free cash flow / enterprise value at 8.15% (levered free cash flow at $924.37M and enterprise value at $11.34B). The stock has gained 15.66% over the last year.

14. Telecom Italia SpA (NYSE:TI): Diversified Communication Services Industry. Market cap of $26.85B. Dividend yield at 6.05%. Levered free cash flow / enterprise value at 7.79% (levered free cash flow at $5.73B and enterprise value at $73.57B). The stock has gained 25.9% over the last year.

15. Lorillard, Inc. (NYSE:LO):
Cigarettes Industry. Market cap of $16.22B. Dividend yield at 4.61%. Levered free cash flow / enterprise value at 7.73% (levered free cash flow at $1.21B and enterprise value at $15.65B). The stock appears to have good liquidity to back up its dividend -- current ratio at 1.66 and quick ratio at 1.5. The stock has had a good month, gaining 15.4%.

16. R.R. Donnelley & Sons Company (NASDAQ:RRD):
Business Services Industry. Market cap of $4.35B. Dividend yield at 4.96%. Levered free cash flow / enterprise value at 6.51% (levered free cash flow at $486.00M and enterprise value at $7.47B). The stock appears to have good liquidity to back up its dividend -- current ratio at 1.54 and quick ratio at 1.25. The stock has had a good month, gaining 11.2%.

17. Cincinnati Financial Corp. (NASDAQ:CINF): Property & Casualty Insurance Industry. Market cap of $5.08B. Dividend yield at 5.14%. Levered free cash flow / enterprise value at 6.13% (levered free cash flow at $339.50M and enterprise value at $5.54B). The stock is a short squeeze candidate, with a short float at 7.04% (equivalent to 10.77 days of average volume). The stock has gained 18.67% over the last year.

18. Piedmont Office Realty Trust Inc. (NYSE:PDM): REIT Industry. Market cap of $3.53B. Dividend yield at 6.17%. Levered free cash flow / enterprise value at 5.85% (levered free cash flow at $297.86M and enterprise value at $5.09B). The stock has gained 17.96% over the last year.

19. Reynolds American Inc. (NYSE:RAI):
Cigarettes Industry. Market cap of $22.58B. Dividend yield at 5.47%. Levered free cash flow / enterprise value at 5.41% (levered free cash flow at $1.28B and enterprise value at $23.68B). The stock has gained 52.72% over the last year.

20. Southern Copper Corp. (NYSE:SCCO): Copper Industry. Market cap of $30.41B. Dividend yield at 6.26%. Levered free cash flow / enterprise value at 5.39% (levered free cash flow at $1.67B and enterprise value at $30.97B). The stock has gained 39.44% over the last year.

*Levered free cash flow and enterprise value sourced from Yahoo! Finance, all other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 20 High-Yield Stocks Undervalued Relative to Levered Free Cash Flow