Our favourite play is Royal Bank of Canada (RY). It has a quarterly revenue growth rate of 4.3%, a strong quarterly earning's growth rate of 42.6%, a five-year dividend growth rate of 7.3%, a five-year dividend average of 4.9%, a decent payout ratio of 50%, a ROE of 15.92% and has been paying dividends since 1870. It also sports a high beta of 1.38, which makes it a good candidate for covered writes; selling covered calls can potentially open up a lucrative second stream of income.
Before we go any further we would like to state that there are many metrics/ratios that are important when it comes to investing in stocks that pay dividends. We have listed some of the more important ones below and investors will find that understanding these ratios could prove to be tremendously useful during the selection process.
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.
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.
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.
Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of one 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.
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 than it is making; this situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, it 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 some time. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever; if your tolerance for risk is low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest, "7 Stocks With Attractive Yields As High As 8.6%."
Two other play's investors might find interesting are Encana Corporation (ECA) and Transcanada Corporation Holdin (TRP), which sport yields of 4.3% and 4% respectively.
Transcanada Corporation Holding has a quarterly revenue growth rate of 12.45%, a ROE of 8.75%, a five-year dividend growth rate of 29.28%, has a five-year dividend growth rate of 8.3%, a 5-year dividend average of 3.8%, a payout ratio of 80%, has consecutively increased dividends for eight years in a row, and has been paying dividends since 1964. TRP has a levered free cash flow rate of $-624million, a beta of 0.70 and a current ratio of 0.53.
Net income for the past three years is as follows
- 2008= $1.19 billion
- 2009= $1.36 billion
- 2010= $1.28 billion
Net income for the past three years is as follows
- 2008= $2.3 billion
- 2009= $2.85 billion
- 2010= $3.16 billion
Key Ratios
- P/E Ratio = 20
- P/E High - Last 5 Yrs = 21.70
- P/E Low - Last 5 Yrs = 10.0
- Price to Sales = 3.22
- Price to Book = 1.89
- Price to Tangible Book = 2.89
- Price to Cash Flow = 10.00
- Price to Free Cash Flow = -34.60
ECA has enterprise value of $20 billion, a yield of 4.3%, a revenue growth of -3%, a ROE of 1.38%, a five-year dividend growth rate of 31.6%, a five-year dividend average of 4.00%, has total three-year return of -2.3% and has been paying dividends since 1960. It has a levered free cash flow rate of $-2.24 billion, a current ratio of 0.81 and beta of 1.14. It's a good candidate for covered writes.
Net income for the past three years is as follows:
- 2008= $4.8 billion
- 2009 = $1.86 billion
- 2010= $1.499 billion
Total cash flow from operating activities
- 2008= $4.18 billion
- 2009= $1.86 billion
- 2010= $1.5 billion
Key Ratios
- P/E Ratio = 48
- P/E High - Last 5 Yrs = 17.60
- P/E Low - Last 5 Yrs = 2.30
- Price to Sales = 2.04
- Price to Book = 0.92
- Price to Tangible Book = 1.02
- Price to Cash Flow = 4.10
- Price to Free Cash Flow = -6.60
Stock | Dividend Yield | Market Cap | Forward PE | EBITDA | Quarterly Revenue Growth | Beta | Revenue | Operating Cash flow |
9.20% | 4.30B | 9.79 | 1.09B | 1.80% | 1.11 | 1.09B | 525.75M | |
8.10% | 3.45B | 33.71 | 650.72M | 10.50% | 1.47 | 1.14B | 554.23M | |
4.90% | 3.01B | 20.09 | 262.59M | 23.90% | 1.25 | 1.91B | 239.51M | |
5.00% | 31.74B | 12.59 | 7.49B | 8.70% | 0.56 | 18.85B | 4.84B | |
4.00% | 76.36B | 10.5 | N/A | 4.30% | 1.38 | 22.90B | 12.01B |
Enerplus Corp
Industry : Production & Extraction
It has a levered free cash flow rate of $-256 million and a current ratio of 0.66
Net income for the past three years
2008 = $-85.92 million
2009 = $85.01 million
2010 = $127.93 million
Total cash flow from operating activities
2008 = $1.04 billion
2009 = $740.01 million
2010 = $707.65 million
Key Ratios
P/E Ratio = 10.1
P/E High - Last 5 Yrs = 148.6
P/E Low - Last 5 Yrs = 3.8
Price to Sales = 3.1
Price to Book = 1.19
Price to Tangible Book = 1.25
Price to Cash Flow = 4.8
Price to Free Cash Flow = -7.1
Quick Ratio = 0.3
Current Ratio = 0.7
LT Debt to Equity = 0.19
Total Debt to Equity = 0.2
Interest Coverage = 9.8
Inventory Turnover = N.A.
Asset Turnover = 0.2
ROE = 20.2%
Return on Assets = 7.7%
200 day moving average = 26.87
Current Ratio = 0.66
Total debt = 782.31M
Book value = 20.28
Qtrly Earnings Growth = N/A
Dividend yield 5 year average = 13.1%
Dividend rate = $ 2.16
Payout ratio = 278%
Dividend growth rate 3 year avg = -19.6%
Dividend growth rate 5 year avg = -9.21%
Consecutive dividend increases = 0 years
Paying dividends since = 2000
Total return last 3 years = N/A
Total return last 3 years = N/A
Pengrowth Energy Corp
Industry : Production & Extraction
It has a levered free cash flow of $-2.1 million and a current ratio of 0.71.
Net income for the past three years
2008 = $-562.72 million
2009 = $84.86 million
2010 = $230.26 million
Total cash flow from operating activities
2008 = $746.72 million
2009 = $551.35 million
2010 = $606 million
Key Ratios
P/E Ratio = 32.8
P/E High - Last 5 Yrs = 34.2
P/E Low - Last 5 Yrs = 5.3
Price to Sales = 2.64
Price to Book = 1.24
Price to Tangible Book = 1.61
Price to Cash Flow = 6.4
Price to Free Cash Flow = 18.2
Quick Ratio = 0.5
Current Ratio = 0.7
LT Debt to Equity = 0.4
Total Debt to Equity = 0.41
Interest Coverage = 2.5
Inventory Turnover = N.A.
Asset Turnover = 0.3
ROE = 0.69%
Return on Assets = 1.91%
200 day moving average = 10.69
Current Ratio = 0.71
Total debt = 1.27B
Book value = 9.37
Qtrly Earnings Growth = N/A
Dividend yield 5 year average = 15.7%
Dividend rate = $ 0.84
Payout ratio = 101%
Dividend growth rate 3 year avg = -31%
Dividend growth rate 5 year avg = 0%
Consecutive dividend increases = 0 years
Paying dividends since = 2006
Total return last 3 years = N/A
Total return last 3 years = N/A
Provident Energy Ltd
Industry : Equipment & Services
It has a levered free cash flow $-76.40 million and a current ratio of 1.33.
Net income for the past three years
2008 = $13.93 million
2009 = $-84.92 million
2010 = $-337.24 million
Total cash flow from operating activities
2008 = $551.89 million
2009 = $290.22 million
2010 = $-39.93 million
Key Ratios
P/E Ratio = 22.7
P/E High - Last 5 Yrs = N.A.
P/E Low - Last 5 Yrs = N.A.
Price to Sales = 1.55
Price to Book = 5.39
Price to Tangible Book = 8.44
Price to Cash Flow = 17.8
Price to Free Cash Flow = -23
Quick Ratio = 0.6
Current Ratio = 1.3
LT Debt to Equity = 0.9
Total Debt to Equity = 0.9
Interest Coverage = 3.9
Inventory Turnover = 11.2
Asset Turnover = 1.4
ROE = 23.15%
Return on Assets = 9.43%
200 day moving average = 8.99
Current Ratio = 1.33
Total debt = 518.59M
Book value = 2.12
Qtrly Earnings Growth = 439%
Dividend yield 5 year average = 13.7%
Dividend rate = $ 0.54
Payout ratio = 133%
Dividend growth rate 3 year avg = -21.41%
Dividend growth rate 5 year avg = -12.85%
Consecutive dividend increases = 0 years
Paying dividends since = 2001
Total return last 3 years = 225.27%
Total return last 3 years = 70.59%
BCE Inc.
Industry : Services
It has a levered free cash flow rate of $1.06 billion and current ratio 0.76.
Net income for the past three years
2008 = $770.84 million
2009 = $1.66 billion
2010 = $2.3 billion
Total cash flow from operating activities
2008 = $4.91 billion
2009 = $4.66 billion
2010 = $4.76 billion
Key Ratios
P/E Ratio = 14.1
P/E High - Last 5 Yrs = 48.2
P/E Low - Last 5 Yrs = 5
Price to Sales = 1.64
Price to Book = 3.18
Price to Tangible Book = -7.03
Price to Cash Flow = 6.1
Price to Free Cash Flow = -24.6
Quick Ratio = 0.6
Current Ratio = 0.8
LT Debt to Equity = 1.21
Total Debt to Equity = 1.42
Interest Coverage = 2.8
Inventory Turnover = 22.4
Asset Turnover = 0.5
ROE = 16.7%
Return on Assets = 6.63%
200 day moving average = 39.15
Current Ratio = 0.76
Total debt = 14.84B
Book value = 13.41
Qtrly Earnings Growth = 40.3%
Dividend yield 5 year average = 4.7%
Dividend rate = $ 2.17
Payout ratio = 0%
Dividend growth rate 3 year avg = 47.99%
Dividend growth rate 5 year avg = 43.04%
Consecutive dividend increases = 3 years
Paying dividends since = 2006
Total return last 3 years = 132.56%
Total return last 3 years = 95.46%
Royal Bank of Canada
Industry : Banking
It has a free cash flow rate of $7.5 billion, which works out to $5.02 per share, and a beta of 1.38, which makes it an ideal candidate for covered writes. It also sports a strong quarterly earnings growth rate of 42%, has operating margin of 39% and a ROE of 15.92%
Net income for the past three years
2009 = $3.59 billion
2010 = $5.14 billion
2011 = $4.89 billion
Total cash flow from operating activities
2009 = $6.88 billion
2010 = $11.1 billion
2011 = $10.41 billion
Key Ratios
P/E Ratio = 16.6
P/E High - Last 5 Yrs = 23
P/E Low - Last 5 Yrs = 8.6
Price to Sales = 2.13
Price to Book = 2.06
Price to Tangible Book = 2.81
Price to Cash Flow = 16.2
Price to Free Cash Flow = 27.9
Quick Ratio = N.A.
Current Ratio = N.A.
LT Debt to Equity = 0.21
Total Debt to Equity = 1.41
Interest Coverage = 2
Inventory Turnover = N.A.
Asset Turnover = 0
ROE = 15.92%
Return on Assets = 0.91%
200 day moving average = 48.99
Current Ratio = N/A
Total debt = 154.23B
Book value = 25.43
Qtrly Earnings Growth = 42.6%
Dividend yield 5 year average = 4.9%
Dividend rate = $ 2.16
Payout ratio = 50%
Dividend growth rate 3 year avg = 2%
Dividend growth rate 5 year avg = 7.3%
Consecutive dividend increases = 1 years
Paying dividends since = 1870
Total return last 3 years = 160.16%
Total return last 3 years = 36.05%
Conclusion
The topic we have been speaking about for some time appears to have taken hold. Our view was that after the SPX hit our suggested targets (1305-1325, with the possibility of an intraday spike to the 1340 ranges) it would put in a top and pull back.
On Dec. 16, we made the following comments:
On a short-term basis, the Dow has put in a bottom and is getting ready to challenge the 12,000 ranges again. However, there is a chance that the recent lows could be tested before the rally gathers steam. Going out a little further, the cycles suggest that the Dow should be able to rally until early next year and there is a fairly good chance that the Dow could trade to the 12,800 range and the and the SPX could trade to the 1305-1330 plus range with the possibility of mounting an intra-day spike to the 1340 range. The dollar is overbought and has generated a few sell signals on the hourly time frames, so a pullback here would help drive commodities and the general market higher.
In a recent article written on Dec. 26 and published on Dec. 27, we made the following comments:
Going forward, we think that the markets could put in a short term top around the 27-29th of this month. The pullback should provide traders with a good opportunity to open up long positions.
On the Jan. 3, we made the following statement:
While we still feel that the SPX could trade to the 1300-1320 ranges, our advice to long-term traders would be to sit on the sidelines waiting for opportune moments to present themselves before deploying large sums of money into this market. Fixed income investors can hedge themselves to some degree by selling covered calls. A more aggressive option would be to purchase long-term puts to hedge your portfolio against a potentially strong sell-off.
Long-term dividend players would be best served by waiting for a pullback before committing fresh money to this market. After a sell-off a good strategy to open up a second stream of income (only use this strategy if you are bullish on the stock) is to sell naked puts. If the stock trades below your strike price you will be assigned the shares but at a much lower price (strike price minus the premium you were paid); if the stock does not trade below the strike price, you get to walk away with the premium. Long-term dividend players can hedge themselves to some degree by selling covered calls on the positions their own. Selling covered calls is a great way to open up a second stream of income.
All charts sourced from dividata.com
Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
