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Today, we are going to examine 7 stocks, two of which are definitely speculative in nature. The speculative plays are Overseas Shipholding Group, Inc (OSG) and H&Q Life Sciences Investors Com (NYSE:HQL). Before we go any further we would like to state that traders should not base their investment decision on yield alone, but examine some of the key metrics described below as they could prove to be very helpful in the selection process. It is okay to deploy some capital into riskier plays but betting the house is asking for trouble.

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 Plays Sporting Yields As High As 19.8%

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.

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.

Price to sales ratio is calculated by dividing the company's share price by its revenue per share. Generally, the smaller the ratio (less than 1.0) the better the investment since the investor is paying less for each unit of sales. However, there are exceptions as a company with a low price to sales ratio could be unprofitable. It is sometimes used to determine the relative valuation of a sector.

The payout ratio tells us what portion of the profit is being returned to investors. A pay out 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

Our favorite play is SDRL. Net income has increased over the past 4 years from roughly $240 million in 2006 to over $ 1 billion in 2010. 2011 should prove to be another block buster year for SDRL. It has ROE of 31.43%, a three year dividend growth rate of 115%, a 3 year total return of 465%, and a beta of 1.72 which makes it a great candidate for covered writes. It has an order back log in excess of $13 billion and continues to secure long term contracts. It also has the largest modern fleet in the industry.

Three other interesting plays are PEPCO Holdings Inc Common Stock (NYSE:POM), Ameren Corporation Common Stock (NYSE:AEE) and Overseas Shipholding Group, Inc which sport yields of 5.40%, 5.00% and 6.6% respectively.

PEPCO Holdings Inc Common Stock , has a quarterly revenue growth rate of -20%, a ROE of 5.86%, quarterly earnings growth rate of 370%, a total three-year return of 31.4%, a five-year dividend growth rate of 0.71%, a five dividend average of 5.6%, a payout ratio of 98%, and it has been paying dividends since 1904. It has a free cash flow rate of- $226 million, a current ratio of 0.96 and a beta of 0.33.

Net income for the past three years

  1. 2008= 300 million
  2. 2009= $235 million
  3. 2010= $32 million
  4. 2011= It stands at $238 million and could top the $320 million mark.

Total cash flow from operating activities

  1. 2008= 413 million
  2. 2009= $606 million
  3. 2010= $813 million
  4. 2011= It stands at $531 million and could top the $730million mark.

Ameren Corporation Common Stock , has a quarterly revenue growth rate of -0.10%, a ROE of 6.9%, a price to sales of 0.98, a price to book of 0.95, a total three-year return of 8.48%, a five-year dividend growth rate of -7.68%, a five dividend average of 5.9%, a payout ratio of 69%, and it has been paying dividends since 1906. It has a free cash flow rate of-$585 million, a current ratio of 1.45 and a beta of 0.51. AEE is trading roughly $2 below book value and the dividend was increased from 38.5 cents to 40 cents.

Net income for the past three years

  1. 2008= 605 million
  2. 2009= $612 million
  3. 2010= $139 million
  4. 2011= It stands at $494 million and could top the $775 million mark.

Total cash flow from operating activities

  1. 2008= 1.5 billion
  2. 2009= $1.97 billion
  3. 2010= $1.84 billion
  4. 2011= It stands at $1.5 billion and could top the $2.29 billion mark.

Overseas Shipholding Group, Inc has a quarterly revenue growth rate of - 1.40, a ROE of -11.46%, a total three-year return of -53%, a five-year dividend growth rate of 5.4%, a five dividend average of 11.82%, and it has been paying dividends since 1990. It has a free cash flow rate of- $297 million, a current ratio of 2.44 and a beta of 1.32. Dividends have been cut from by over 50% from 43 cents to 21 cents. Only individuals willing to take on extra risk should consider this play.

Net income for the past three years

  1. 2008= 317 million
  2. 2009= $70 million
  3. 2010=- $134 million
  4. 2011= It stands at- $143 million and could top the -$213 million mark.

Total cash flow from operating activities

  1. 2008= 366 million
  2. 2009= $218 million
  3. 2010= -$27 million
  4. 2011= It stands at- $25.5 million and could top the -$40 million mark.

Red Flags

Dividend has been cut by over 50%, net income and total cash flow from operating activities turned negative in 2010 and is on course to remain negative for 2011. The stock has taken a severe beating and so the worst could already be priced in and so risk takers could be handsomely rewarded in the future. Insiders continue to deploy capital into this stock and insiders only invest for one reason; the reason being to make money. The full list of insider transactions can be accessed here.

Investors should pay attention to the following risks associated with trusts:

  1. Cash flow is dependent on the price of the underlying commodity and production levels and thus could be subject to swings. If the swings are wide, the dividends paid out could vary widely from year to year.
  2. While investing in royalty trust can yield steady and hefty returns, there is one potential drawback: depletion. These trusts own royalties on a finite amount of resources, and once those resources are gone; the trust is also gone. Investors need to understand that the distributions will eventually decline and disappear. It is essential that you do your due diligence before opening a position in the trusts that are discussed in this article.
  3. The problem is that the cash flow is dependent on the price of the underlying commodity and production levels and thus could be subject to swings. If the swings are wide, the dividends paid out could vary widely from year to year.
  4. Trusts have no physical operations of their own; they are just financing vehicles that are run by financial institutions such as banks. The resources are mined by other companies, and these companies then pay a royalty on the resources mined to the trust.
  5. While investing in royalty trust can yield steady and hefty returns, there is one potential drawback: depletion. These trusts own royalties on a finite amount of resources, and once those resources are gone, the trust is also gone. Most trusts won't likely hit this point for 1-3 decades, but investors need to understand that the distributions will eventually decline and disappear. It is essential that you do your due diligence before opening any positions in the above-mentioned oil trusts.

Stock

Dividend Yield

Market Cap

Forward PE

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

QRE

5.80%

783.86M

14.25

74.47M

-66.00%

N/A

172.06M

48.39M

BPT

8.10%

2.48B

N/A

N/A

24.80%

0.75

203.56M

N/A

SDRL

8.80%

16.69B

11.2

2.32B

-3.70%

1.72

4.30B

1.76B

HQL*

11.50%

180.18M

N/A

N/A

-89.60%

0.74

568.95K

118.34M

  1. Speculative play

Seadrill Ltd (NYSE:SDRL)

Industry : Production & Extraction

Net income has increased over the past 4 years from roughly $240 million in 2006 to over $ 1 billion in 2010. 2011 should prove to be another block buster year for SDRL.

Key Ratios

  • P/E Ratio = 11.7
  • P/E High - Last 5 Yrs = N.A.
  • P/E Low - Last 5 Yrs = N.A.
  • Price to Sales = 5.34
  • Price to Book = 2.6
  • Price to Tangible Book = 3.27
  • Price to Cash Flow = 8.5
  • Price to Free Cash Flow = -7.1
  • Quick Ratio = 0.6
  • Current Ratio = 0.8
  • LT Debt to Equity = 1.37
  • Total Debt to Equity = 1.53
  • Interest Coverage = 8.3
  • Inventory Turnover = N.A.
  • Asset Turnover = 0.2

  • ROE = 31.43%
  • Return on Assets = 6.34%
  • 200 day moving average = 32.55
  • Current Ratio = 0.77
  • Total debt = 9.86B
  • Book value = 13.79
  • Qtrly Earnings Growth = -90%
  • Dividend yield 5 year average = 0%
  • Dividend rate = $ 2.89
  • Payout ratio = 82%
  • Dividend growth rate 3 year avg = 115.52%
  • Dividend growth rate 5 year avg = 0%
  • Consecutive dividend increases = 2 years
  • Total return last 3 years = 465.74%
  • Total return last 5 years = 163.31%

Positive factors

It has an order back log in excess of $13 billion and continues to secure long term contracts. It also has the largest modern fleet in the industry.

QR Energy LP (NYSE:QRE)

Industry: Production & Extraction

Net income for the past two years

  • 2009 = $-7.89 million
  • 2010 = $-5.29 million
  • 2011= it stands at $68 million and could top the $120 million mark.

Total cash flow from operating activities

  • 2009 = $64.91 million
  • 2010 = $95.67 million

Key Ratios

  • P/E Ratio = 20.5
  • P/E High - Last 5 Yrs = N.A.
  • P/E Low - Last 5 Yrs = N.A.
  • Price to Sales = 4.64
  • Price to Book = 3.59
  • Price to Tangible Book = 3.59
  • Price to Cash Flow = 9.1
  • Price to Free Cash Flow = 44.9
  • Quick Ratio = 1.3
  • Current Ratio = 2.7
  • LT Debt to Equity = 1.22
  • Total Debt to Equity = 1.22
  • Interest Coverage = 4.4
  • Inventory Turnover = N.A.
  • Asset Turnover = 0.2
  • ROE = 6.56%
  • Return on Assets = 3.38%
  • 200 day moving average = 19.99
  • Current Ratio = 2.66
  • Total debt = 283.29M
  • Book value = 6.09
  • Qtrly Earnings Growth = N/A
  • Dividend yield 5 year average = 0%
  • Dividend rate = $ 1.90
  • Payout ratio = 0%
  • Dividend growth rate 3 year avg = 0%
  • Dividend growth rate 5 year avg = 0%
  • Consecutive dividend increases = 0 years
  • Paying dividends since = 2011
  • Total return last 3 years = N/A
  • Total return last 5 years = N/A

Potential warning

Quarterly revenue growth rate is -66%. On the positive side net income has exploded in 2011 and could top the $120 million which would mark a huge improvement from the -5.2 million dollars it reported in 2010.

BP Prudhoe Bay Royalty Trust (NYSE:BPT)

Industry : Production & Extraction

Net income for the past three years

  • 2008 = $250.54 million
  • 2009 = $158.04 million
  • 2010 = $184.42 million

Total cash flow from operating activities

  • 2008 = N/A
  • 2009 = N/A
  • 2010 = N/A

Key Ratios

  • P/E Ratio = 12.4
  • P/E High - Last 5 Yrs = 13.9
  • P/E Low - Last 5 Yrs = 5
  • Price to Sales = 12.35
  • Price to Book = 3627.19
  • Price to Tangible Book = 3627.19
  • Price to Cash Flow = 12.4
  • Price to Free Cash Flow = N.A.
  • Quick Ratio = N.A.
  • Current Ratio = N.A.
  • LT Debt to Equity = 0
  • Total Debt to Equity = 0
  • Interest Coverage = N.A.
  • Inventory Turnover = N.A.
  • Asset Turnover = 162.7

  • ROE = 20225.77%
  • Return on Assets = 10110.82%
  • 200 day moving average = 111.2
  • Current Ratio = 3.26
  • Total debt = 0
  • Book value = 0.03
  • Qtrly Earnings Growth = 25.9%
  • Dividend yield 5 year average = 10.3%
  • Dividend rate = $ 9.50
  • Payout ratio = 0%
  • Dividend growth rate 3 year avg = -1.41%
  • Dividend growth rate 5 year avg = 3.21%
  • Consecutive dividend increases = 0 years
  • Paying dividends since = 1990
  • Total return last 3 years = 98.04%
  • Total return last 5 years = 124.78%

H&Q Life Sciences Investors

Industry: Holding and other Investment Offices

It has a current ratio of 22.47 and a levered free cash flow rate of -$11 million.

Key Ratios

  • P/E RatioN.A.
  • P/E High - Last 5 Yrs N.A.
  • P/E Low - Last 5 Yrs N.A.
  • Price to Sales0
  • Price to Book0
  • Price to Tangible Book0
  • Price to Cash Flow N.A.
  • Price to Free Cash Flow N.A.
  • Quick RatioN.A.
  • Current RatioN.A.
  • LT Debt to Equity 0
  • Total Debt to Equity N.A.
  • Interest Coverage N.A.
  • Inventory Turnover N.A.
  • Asset Turnover 0

  • ROE 17.76%
  • Return on Assets -1.11%
  • 200 day moving average 11.24
  • Current Ratio 22.87
  • Total debt 0
  • Book value 11.7
  • Qtrly Earnings Growth N/A
  • Dividend yield 5 year average 8.90%
  • Dividend rate $ 1.42
  • Payout ratio 0.00%
  • Dividend growth rate 3 year avg37.12%
  • Dividend growth rate 5 year avg19.95%
  • Consecutive dividend increases2 years
  • Paying dividends since 1996
  • Total return last 3 years 45.03%
  • Total return last 5 years -6.29%

Potential warning

Quarterly revenue growth has dropped by huge -89.7%. Only individuals willing to take on extra risk should get into this play.

Conclusion

We had issued targets for the SPX to trade to the 1305-1325 ranges over a month ago, with the possibility of it spiking on an intra day basis to the 1335-1345 ranges. To date, the SPX has traded as high as 1322, 3 points shy of our target. At this point, we feel that the markets are overbought and due for a pullback. Long-term investors would be best served if they waited for the markets to pull back before committing large sums of money to the market. One way to generate money is to sell naked puts on stocks you would not mind owning. If the stock trades below the strike price you will be assigned the shares at the price you want to pay; in fact, final price will be the strike price minus the premium you received when you sold the put. If the stock does not trade below the strike price, you get paid for waiting.

All charts sourced from dividata.com

Source: 7 Candidates With Yields As High As 11.5%