If you are new to the dividend game, the following key metrics could prove to be very useful in the selection process.
Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.
The payout ratio tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders then they are making; this situation cannot last forever. In general, if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while.
As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for sometime. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever; if your tolerance for risk is a low, look for similar companies with the same or higher yields, but with lower payout ratios.
Turnover ratio lets you know the number of times a company's inventory is replaced in a given time period. It is calculated by dividing the cost of goods sold by average inventory during the time period studied. A high turn over ratio indicates that a company is producing and selling its good and services very quickly.
Debt to equity ratio is found by dividing the company's total amount of long-term debt (debts with interest rates that have a maturity longer than one year) by the total amount of equity. A debt to equity ratio of 0.5 tells us that the company is using 50 cents of liabilities in addition to each $1 dollar of shareholders equity in the business. There is no fixed ideal number as it depends on the industry the company is in. However, in general, a ratio under 1 is acceptable and ideally it should be in the 0.5-0.6 ranges.
Enterprise value is a combination of the market cap, debt, minority interests, preferred shares less total cash and cash equivalents. This provides a better picture because it is a more accurate representation of a company's value contrary to simply looking at the market cap.
Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa. Individuals searching for other ideas might find this article to be of interest 7 Stocks That Sport Lofty Yields As High As 20%.
Current ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardising their future earnings. Ideally the company should have a ratio of 1 or higher.
Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of 1 year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa.
Price to cash flow ratio is obtained by dividing the share price by cash flow per share. It is a measure of the market's expectations of a company's future financial health. The affects of depreciation and other non cash factors are removed, and this makes it easier for investors to assess foreign companies in the same industry. This ratio also provides a measure of relative value like the price to earning's ratio.
Price to free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa; lower ratios are generally more attractive. If a company generated 400 million in cash flow and then spent 100 million on capital expenditure, then its free flow is $300 million. If the share price is 100 and the free cash flow per share are $5, then company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry; this gives you an idea of how the company you are interested in holds up to the other companies within the industry.
Our favourite play on the list is Black Hills Corporation (BKH) and our second favourite play is Westar Energy Inc (WR). Black Hills Corporation has a ROE of 8.81%, a quarterly revenue growth rate of 2.8%, a 5 year dividend growth rate of 2.04%, a five year dividend average of 4.6%, a total return for the past 3 years of 49.8%%, has consecutively increased its dividend for 20 years in a row and has been paying dividends since 1942.
Westar Energy Inc has a ROE of 8.81%, a quarterly earnings growth of 17.60%, a 5 year dividend growth rate of 5.08%, a five year dividend average of 5.00%, a total return for the past 3 years of 64.5%, has consecutively increased its dividend for seven years in a row and has been paying dividends since 1924.
Two other notable plays are Ferrellgas Partners, L.P. Commo (FGP) and Golar LNG Limited (GLNG) which sport yields of 11.5% and 2.90%respectively.
Ferrellgas Partners, L.P. has an enterprise value of $2.67 billion, a quarterly revenue growth rate of 34.5%, a healthy five-year dividend average of 9.90%, a total rate of return for the last three years of 55% and has been paying dividends since 19948. It also has a positive levered free cash flow rate of $67.56 million. Ferrellgas Partners, L.P. also sports the following ratios: Price/sales of 0.55, price to tangible book of -3.22, price to cash flow of 40.60, price to free cash flow of -11.80, a five-year sales growth rate of .98 and a beta of 0.44.
Net income for the past three years
2008 = $ 52 million
- 2009 = $ 32 million
- 2010 = -$43 million
Golar LNG Limited is one of the world's largest independent owners and operators of LNG carriers and is well positioned to benefit as the demand for LNG increases in the years to come. Golar LNG Limited developed the world's first Floating Storage and Regasification Unit based on the conversion of existing LNG carriers and leads the industry with committed projects. There is going to be a building spree of natural gas liquefaction plants as it makes sense to export natural gas to Asia and Europe due to the huge price differentials between what natural gas commands in the US and what it sells for in Asia and Europe. Price in Asia spiked as high as $15.
Golar LNG Limited has a yield of 2.5%. an enterprise value of $27.13 billion a revenue growth of 10.4%, a very strong quarterly earnings growth rate of 232% , a ROE of 9.46%, a five-year dividend growth rate of 92%, a five dividend average of 8.10%, a total 3 year return of 640%, a five year total return of 283%, and has been paying dividends since 2007. It has an operating cash flow of $161 million and revenues of $283 million.
Net income for the past three years
2008 = -$ 9.8 million
- 2009 = $ 23 million
- 2010 = $384,000
Total cash flow from operating activities for the past 3 years
2008 = $ 48.4 million
- 2009 = $ 43.7 million
- 2010 = $ 51.7 million
It recently announced a special dividend of $0.30 which is 3 cents higher than the last payment of 27 cents.
- Price to sales 15.58
- Price to tangible book 6.40
- Price to cash flow 58.80
- Price to free cash flow 23.30
- 5 year sales growth 4.35
Facts investors should be aware in regards to investing in MLP's and REITS
- Payout ratios are not that important when it comes to MLPS. Both are required by law to pay a majority of their cash flow as distributions. Payout ratios are calculated by dividing the dividend/distribution rate by the net income per share, and this is why the payout ratio for MLPs is often higher than 100%. The more important ratio to focus on is the cash flow per unit. If one focuses on the cash flow per unit, one will see that in most cases, it exceeds the distribution declared per unit.
- MLPs are not taxed like regular corporations because they pay out a large portion of their income to partners (as an investor you are basically a partner and are allocated units instead of shares) usually through quarterly distributions. The burden is thus shifted to the partners who are taxed at their ordinary income rates. As ordinary income tax rates of investors are typically lower than the income tax assessed on corporations, this arrangement is advantageous to the MLPs and generally most investors.
- MLPs issue a Schedule K-1 to their investors. If the MLP pays out distributions in excess of the income it generates, the distribution is classified as a "return of capital" and tax deferred until you sell your shares or units. Income from MLPs is generally taxable even in retirement accounts like 401KS and IRAs if the income generated is in excess of $1000.
Stock | Dividend Yield | Market Cap | Forward PE | EBITDA | Quarterly Revenue Growth | Beta | Revenue | Operating Cash flow |
4.30% | 1.33B | 15.34 | 321.10M | 2.80% | 1.00 | 1.31B | 228.52M | |
15.40% | 4.83B | 18.65 | 2.45B | -8.00% | 0.65 | 5.32B | 1.61B | |
4.50% | 3.30B | 14.29 | 773.97M | 5.20% | 0.52 | 2.14B | 445.11M | |
1.20% | 20.83B | 8.71 | 4.00B | 27.00% | 1.47 | 18.87B | 960.00M | |
4.60% | 28.35B | 14.87 | 4.97B | 0.50% | 0.31 | 14.31B | 3.88B |
Black Hills Corporation
Industry: Electric Utilities
It has a levered free cash flow rate of -$266 million and a current ratio of 0.75. It has consecutively raised its dividends for 20 years in a row; out of a possible 5 stars we would assign BKH a full five.
Net income for the past three years
2008 = $.11 billion
2009 = $.08 billion
2010 = $.07 billion
Total cash flow from operating activities
2008 = $.15 billion
2009 = $.27 billion
2010 = $.15 billion
Key Ratios
P/E Ratio23.4
P/E High - Last 5 Yrs19.6
P/E Low - Last 5 Yrs6.9
Price to Sales1.07
Price to Book1.24
Price to Tangible Book1.85
Price to Cash Flow7
Price to Free Cash Flow-4.4
Quick Ratio0.4
Current Ratio0.7
LT Debt to Equity1.18
Total Debt to Equity1.18
Interest Coverage1.7
Inventory Turnover9.10
Asset Turnover0.3
ROE 5.32%
Return on Assets 3.09%
200 day moving average 31.49
Current Ratio 0.75
Total debt 1.77B
Book value 27.57
Dividend yield 5 year average 4.60%
Dividend rate $1.46
Payout ratio 100.00%
Dividend growth rate 3 year avg 1.41%
Dividend growth rate 5 year avg 2.04%
Consecutive dividend increases 20 years
Paying dividends since 1942
Total return last 3 years 49.86%
Total return last 5 years 9.18%
FRONTIER COMMUNICATIONS CORP
Industry: Telecom Services - Domestic
It has a levered free cash flow rate of $611 million and current ratio of 0.83
Net income for the past three years
2008 = $.18 billion
2009 = $.12 billion
2010 = $.15 billion
Total cash flow from operating activities
2008 = $.74 billion
2009 = $.74 billion
2010 = $1.22 billion
Key Ratios
P/E Ratio 32.5
P/E High - Last 5 Yrs 42.5
P/E Low - Last 5 Yrs 10.9
Price to Sales 0.91
Price to Book 1.02
Price to Tangible Book-1.29
Price to Cash Flow 3.1
Price to Free Cash Flow-57.5
Quick Ratio 0.6
Current Ratio 0.8
LT Debt to Equity 1.71
Total Debt to Equity 1.72
Interest Coverage 1.4
Inventory Turnover N.A.
Asset Turnover 0.3
ROE 3.15%
Return on Assets 3.65%
200 day moving average 6.26
Current Ratio 0.83
Total debt 8.19B
Book value 4.79
Qtrly Earnings Growth-29.70%
Dividend yield 5 year average12.20%
Dividend rate $0.75
Payout ratio500.00%
Dividend growth rate 3 year avg-8.93%
Dividend growth rate 5 year avg-5.36%
Consecutive dividend increases 0 years
Paying dividends since 2004
Total return last 3 years-1.51%
Total return last 5 years -33.51%
Potential warnings
It has negative quarterly revenue and earnings growth rate.
Westar Energy Inc
Industry: Electric Utilities
It has a levered free cash flow rate of -$174 million and a current ratio of 0.68. It has also consecutively increased dividends for 7 years in a row and has a payout ratio of 70%. Out of a possible 5 stars we would assign WR three.
Net income for the past three years
2008 = $.18 billion
2009 = $.18 billion
2010 = $.2 billion
Total cash flow from operating activities
2008 = $.27 billion
2009 = $.48 billion
2010 = $.61 billion
Key Ratios
P/E Ratio15.4
P/E High - Last 5 Yrs 15.6
P/E Low - Last 5 Yrs 9.4
Price to Sales 1.54
Price to Book 1.28
Price to Tangible Book 1.28
Price to Cash Flow 6.1
Price to Free Cash Flow-8.8
Quick Ratio 0.3
Current Ratio 0.7
LT Debt to Equity 1.06
Total Debt to Equity 1.22
Interest Coverage 2.8
Inventory Turnover 5.50
Asset Turnover 0.3
ROE 8.81%
Return on Assets 3.63%
200 day moving average 26.71
Current Ratio 0.68
Total debt 3.16B
Book value 22.1
Qtrly Earnings Growth 17.60%
Dividend yield 5 year average 5.00%
Dividend rate $1.28
Payout ratio 70.00%
Dividend growth rate 3 year avg 3.34%
Dividend growth rate 5 year avg 5.08%
Consecutive dividend increases 7 years
Paying dividends since 1924
Total return last 3 years 64.15%
Total return last 5 years 32.88%
Baker Hughes Inc.
Industry : Equipment & Services
It has a levered free cash flow rate of -$662 million and a current ratio of 3.12. It has a very strong quarterly earnings growth rate of 172% and a decent quarterly revenue growth rate of 27%. As it sports a fairly high beta it's a good candidate for covered writes.
Net income for the past three years
2008 = $1.64 billion
2009 = $.42 billion
2010 = $.81 billion
Total cash flow from operating activities
2008 = $1.61 billion
2009 = $1.24 billion
2010 = $.86 billion
Key Ratios
P/E Ratio12.1
P/E High - Last 5 Yrs 35.4
P/E Low - Last 5 Yrs 4.6
Price to Sales 1.14
Price to Book 1.38
Price to Tangible Book 2.65
Price to Cash Flow 7
Price to Free Cash Flow-14.5
Quick Ratio 1.9
Current Ratio 3.1
LT Debt to Equity 0.25
Total Debt to Equity 0.25
Interest Coverage 12.3
Inventory Turnover4.80
Asset Turnover 0.8
ROE 11.97%
Return on Assets 7.19%
200 day moving average 57.45
Current Ratio 3.12
Total debt 3.90B
Book value 35.62
Qtrly Earnings Growth 176.90%
Dividend yield 5 year average 1.20%
Dividend rate $0.60
Payout ratio 15.00%
Dividend growth rate 3 year avg 2.38%
Dividend growth rate 5 year avg 2.97%
Consecutive dividend increases 0 years
Paying dividends since1987
Total return last 3 years 75.05%
Total return last 5 years -22.20%
Duke Energy Corp
Industry: Electric Utilities
It has levered free cash flow rate of -$1.19 billion and current ratio of 1.23.
Net income for the past three years
2008 = $1.36 billion
2009 = $1.08 billion
2010 = $1.32 billion
Total cash flow from operating activities
2008 = $3.33 billion
2009 = $3.46 billion
2010 = $4.51 billion
Key Ratios
P/E Ratio15.4
P/E High - Last 5 Yrs 21.6
P/E Low - Last 5 Yrs 10
Price to Sales 1.94
Price to Book 1.25
Price to Tangible Book 1.53
Price to Cash Flow 7.3
Price to Free Cash Flow-15.5
Quick Ratio 0.8
Current Ratio 1.2
LT Debt to Equity 0.77
Total Debt to Equity 0.84
Interest Coverage 4.2
Inventory Turnover 6.60
Asset Turnover 0.2
ROE 8.21%
Return on Assets 3.11%
200 day moving average 19.85
Current Ratio 1.23
Total debt 20.11B
Book value 17.11
Qtrly Earnings Growth-29.60%
Dividend yield 5 year average 5.20%
Dividend rate $1.00
Payout ratio 72.00%
Dividend growth rate 3 year avg 3.23%
Dividend growth rate 5 year avg 0.98%
Consecutive dividend increases 4 years
Paying dividends since 1926
Total return last 3 years 64.31%
Total return last 5 years 39.86%
All charts were sourced from dividata.com
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
