Investors should pay attention to the following key metrics as they could prove to be extremely useful in the selection process.
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 effects 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 its competition within the industry.
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.
Inventory turnover is calculated by dividing sales by inventory. If a company generated $30 million in sales and had an average inventory of $6 million; the inventory turn over would be equal to 5. This value indicates that there are 5 inventory turnovers per year. This means that it takes roughly 2.4 months to sell the inventory. A low inventory turnover is a sign of inefficiency and vice versa.
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 With Attractive Yields As High As 8.6%.
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.
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.
Our two favourite plays on this list are Linn Energy LLC (NASDAQ:LINE) and Southern Copper Corp (NYSE:SCCO). LINE has a very impressive three-year total rate of return in excess of 181%, a five year dividend growth rate of 22.5%, five-year dividend average of 10%, a quarterly revenue growth rate of 32%, a price to book of 12.72, a price to cash flow of 11.10 and a price to free cash flow of 21.60. LINE also sports a levered free cash flow rate of $189 million.
SCCO has a very strong levered free cash flow rate of $1.59 billion, a ROE of 57%, a very impressive three-year total rate of return in excess of 176%, a five year dividend growth rate of 53%, five-year dividend average of 6.8%, a quarterly revenue growth rate of 38%, a quarterly earnings growth rate of 81% and a payout ratio of 91%. It is also a great candidate for covered writes.
Two other notable names are Emerson Electric Company Common (NYSE:EMR) and Ternium S.A. Ternium S.A. Ameri (NYSE:TX) which sport yields of 3.2% and 3.3%, respectively.
Emerson Electric Company Common has a quarterly revenue growth rate of 12.1%, a ROE of 24.43%, quarterly earnings growth rate of 1.60%, a total three-year return of 64.23%, a five-year dividend growth rate of 9.19%, a five dividend average of 2.19%, a low payout ratio of 44%, has consecutively increased dividends for 55 years in a row, and it has been paying dividends since 1947. It has a free cash flow rate of $2.5 billion, a current ratio of 1.45 and a beta of 1.40. The dividend was raised from 34.5 cents to 40 cents. Out of a possible five stars, we would assign EMR with full five. As it sports a rather high beta it is a good candidate for covered writes; selling covered calls opens up a second stream of income.
Net income for the past three years
- 2008= 1.72 billion
- 2009= $2.16 billion
- 2010= $2.48 billion
- 2011= it stands at $1.98 billion and could top the $2.7 billion mark.
Ternium S.A. Ternium S.A. Ameri has a quarterly revenue growth rate of 31.4%, a ROE of 8.93%, quarterly earning's growth rate of -95.8%, a total three-year return of 141%, a five dividend average of 2.2, a payout ratio of 234%, and it has been paying dividends since 2007. It has a free cash flow rate of $77.2 million, a current ratio of 2.6 and a beta of 2.13. The dividend was raised from 50 cents to 75cents. It is a very good candidate for selling covered calls as it sports a rather lofty beta of 2.13. Selling covered calls can sometimes generate more income than the yearly dividend payment.
Net income for the past three years
- 2008= $875 million
- 2009= $767million
- 2010= $779.4million
Important facts investors should be aware of when it comes to investing in MLPs
- Payout ratios are not that important when it comes to MLPS as they 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. For more information, on this topic investors can visit the National Association of Publicly Traded Partnerships.
Stock | Dividend Yield | Market Cap | Forward PE | EBITDA | Quarterly Revenue Growth | Beta | Revenue | Operating Cash flow |
1.70% | 8.72B | 9.73 | 958.82M | 20.50% | 0.98 | 2.59B | 843.12M | |
15.00% | 174.69M | 5.29 | N/A | 26.20% | 1.30 | 46.98M | 22.66M | |
6.80% | 29.71B | 13.69 | 3.92B | 38.80% | 1.70 | 6.65B | 2.14B | |
5.20% | 14.66B | 15.48 | 2.89B | -1.70% | 0.93 | 8.96B | 2.02B | |
7.30% | 6.52B | 16.62 | 1.10B | 32.80% | 0.74 | 792.57M | 573.93M |
B= billion M= Million
Noble Corp. (Switzer land)
Industry: Production & Extraction
It has a levered free cash flow rate of -$1.5 billion and a current ratio of 1.54
Net income for the past three years
2008 = $1.57 billion
2009 = $1.71 billion
2010 = $815.54 million
2011= it stands at $291 million and could top the $450 million mark.
Total cash flow from operating activities
2008 = $1.89 billion
2009 = $2.15 billion
2010 = $1.68 billion
Key Ratios
P/E Ratio = 25.5
P/E High - Last 5 Yrs = 16.2
P/E Low - Last 5 Yrs = 3.1
Price to Sales = 3.35
Price to Book = 1.18
Price to Tangible Book = 1.18
Price to Cash Flow = 8.8
Price to Free Cash Flow = -2.7
Quick Ratio = 1.3
Current Ratio = 1.5
LT Debt to Equity = 0.52
Total Debt to Equity = 0.52
Interest Coverage = 9.1
Inventory Turnover = N.A.
Asset Turnover = 0.2
ROE = 4.51%
Return on Assets = 2.21%
200 day moving average = 33.33
Current Ratio = 1.54
Total debt = 3.81B
Book value = 29.03
Qtrly Earnings Growth = 57.3%
Dividend yield 5 year average = 0%
Dividend rate = $ 0.58
Payout ratio = 19%
Dividend growth rate 5 year avg = 14.88%
Consecutive dividend increases = 0 years
Paying dividends since = 2009
Total return last 3 years = 44.63%
Total return last 5 years = -0.6%
Potential warning
Dividend was cut from 16.64 cents to 15 cents. Net income declined in 2010 and could decline again in 2011.
Arlington Asset Investment Cor
Industry : Credit & Lending
Net income for the past three years
2008 = $-.42 billion
2009 = $.12 billion
2010 = $.03 billion
Total cash flow from operating activities
2008 = $-.08 billion
2009 = $-.08 billion
2010 = $.02 billion
Key Ratios
P/E Ratio 10.6
P/E High - Last 5 Yrs N.A.
P/E Low - Last 5 Yrs N.A.
Price to Sales 5.03
Price to Book 0.93
Price to Tangible Book 0.93
Price to Cash Flow 10.6
Price to Free Cash Flow 36.8
Quick Ratio N.A.
Current Ratio N.A.
LT Debt to Equity 0.08
Total Debt to Equity 0.08
Interest Coverage 10
Inventory Turnover N.A.
Asset Turnover 0
ROE 8.64%
Return on Assets 2.30%
200 day moving average 24.33
Current Ratio 1.02
Total debt 732.83M
Book value 24.19
Qtrly Earnings Growth N/A
Dividend yield 5 year average 28%
Dividend rate $3.38
Payout ratio 146.00%
Consecutive dividend increases 1 year
Total return last 3 years 715.74%
Total return last 5 years -80.91%
Potential warning
Net income has been declining for the past three years in a row. On the bright side dividend, payments have soared since 2007. Only individuals willing to take on extra risk should consider this stock. If you do open a position consider selling covered calls to reduce your risk and to open up a possible second stream of income.
Transocean Inc.
Industry : Production & Extraction
It has a levered cash flow rate of $221 million and a current ratio of 1.54
Net income for the past three years
2008 = $4.21 billion
2009 = $3.19 billion
2010 = $961 million
2011= It stands at $394 million and could potentially come in under $500 million.
Total cash flow from operating activities
2008 = $4.96 billion
2009 = $5.6 billion
2010 = $3.95 billion
Key Ratios
P/E Ratio = N.A.
P/E High - Last 5 Yrs = 31.7
P/E Low - Last 5 Yrs = 3.2
Price to Sales = 1.63
Price to Book = 0.69
Price to Tangible Book = 1.14
Price to Cash Flow = 12
Price to Free Cash Flow = 12.3
Quick Ratio = 1.2
Current Ratio = 1.5
LT Debt to Equity = 0.44
Total Debt to Equity = 0.53
Interest Coverage = 0.5
Inventory Turnover = 10.5
Asset Turnover = 0.2
ROE = -2.37%
Return on Assets = 2.35%
200 day moving average = 50.63
Current Ratio = 1.54
Total debt = 11.12B
Book value = 65.1
Qtrly Earnings Growth = N/A
Dividend yield 5 year average = N/A
Dividend rate = $ 2.37
Payout ratio = 60%
Dividend growth rate 3 year avg = 0%
Dividend growth rate 5 year avg = 0%
Total return last 3 years = -8.9%
Total return last 5 years = -38.12%
Potential warnings
Net income has taken a beating over the past 3 years and quarterly revenue growth has turned negative. The stock has taken a beating and it looks like the worst news might already be priced in; investors willing to take on a little bit of risk could be rewarded over the long haul as the charts are suggesting that a bottom is close at hand.
Southern Copper Corp
Industry : Non-Precious Metals
It has levered free cash flow rate of $1.53 billion, a current ratio of 4.18 and the dividend was increased from 62 cents to 70 cents. It sports a high beta and investor should consider selling covered calls to potentially open up a second income stream.
Net income for the past three years
2008 = $1.41 billion
2009 = $929.39 million
2010 = $1.56 billion
Total cash flow from operating activities
2008 = $1.73 billion
2009 = $963.18 million
2010 = $1.93 billion
Key Ratios
P/E Ratio = 13.3
P/E High - Last 5 Yrs = 33.5
P/E Low - Last 5 Yrs = 4.8
Price to Sales = 4.55
Price to Book = 7.36
Price to Tangible Book = 7.56
Price to Cash Flow = 11.7
Price to Free Cash Flow = 300.9
Quick Ratio = 3.2
Current Ratio = 4.2
LT Debt to Equity = 0.67
Total Debt to Equity = 0.67
Interest Coverage = 18.5
Inventory Turnover = 5.1
Asset Turnover = 0.9
ROE = 57.32%
Return on Assets = 28.73%
200 day moving average = 30.9
Current Ratio = 4.18
Total debt = 2.75B
Book value = 4.89
Qtrly Earnings Growth = 81.6%
Dividend yield 5 year average = 6.8%
Dividend rate = $ 2.46
Payout ratio = 91%
Dividend growth rate 3 year avg = 83.09%
Dividend growth rate 5 year avg = 53.54%
Consecutive dividend increases = 2 years
Paying dividends since = 1996
Total return last 3 years = 176.17%
Total return last 5 years = 132.32%
Linn Energy LLC
Industry: Production & Extraction
It has a levered free cash flow rate of $189 million and a current ratio of 1.45. In 2011 LINE increased production by 30% and is on course to increase production by another 40% in 2012. Thus there is a very good chance that it will increase its dividends again in 2012.
Net income for the past three years
2008 = $999.62 million
2009 = $-298.2 million
2010 = $-114.29 million
Total cash flow from operating activities
2008 = $179.52 million
2009 = $426.81 million
2010 = $270.92 million
Key Ratios
P/E Ratio = 23.2
P/E High - Last 5 Yrs = N.A.
P/E Low - Last 5 Yrs = N.A.
Price to Sales = 3.46
Price to Book = 1.76
Price to Tangible Book = 1.76
Price to Cash Flow = 9.2
Price to Free Cash Flow = -3.8
Quick Ratio = 0.6
Current Ratio = 1.4
LT Debt to Equity = 0.84
Total Debt to Equity = 0.84
Interest Coverage = 2.5
Inventory Turnover = N.A.
Asset Turnover = 0.3
ROE = 11.94%
Return on Assets = 6.96%
200 day moving average = 37.32
Current Ratio = 1.45
Total debt = 3.12B
Book value = 21
Qtrly Earnings Growth = 20117.9%
Dividend yield 5 year average = 10%
Dividend rate = $ 2.76
Payout ratio = 170%
Dividend growth rate 3 year avg = 2.36%
Dividend growth rate 5 year avg = 22.45%
Consecutive dividend increases = 2 years
Paying dividends since = 2006
Total return last 3 years = 181.58%
Total return last 5 years = 43.56%
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.