We would like to stop for a moment and state that investors should try to understand some important key ratios when it comes to dividend investing. To help in this area, we have listed some of the more important ratios/metrics below.
Free cash flow yield is obtained by dividing free cash flow per share by the current price of each share. Generally lower ratios are associated with an unattractive investment and vice versa. Free cash flow takes into account capital expenditures and other ongoing costs associated with the day to day to functions of the business. In our view free cash flow yield is a better valuation metric then earnings yield because of the above factor
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.
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 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. Individuals searching for other ideas might find this article to be of interest 7 Candidates With Yields As High As 11.5%.
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.
Asset turnover is calculated by dividing revenues by assets. It measures a firm's effectiveness at using its assets in generating revenue. Higher numbers are generally better and vice versa. In general companies with low profit margins have higher asset turnover rates then companies with high profit margins.
Quick ratio or acid-test is obtained by adding cash and cash equivalents plus marketable securities and accounts receivable and dividing it by current liabilities. It is a measure of a company's ability to use its quick assets (assets that can be sold of immediately at close to book value) to pay off its current liabilities immediately. A company with a quick ratio of less than 1 cannot pay back its current liabilities.
ROE is obtained by dividing the net income by share holder's equity. It measures how much profit a company generates with the money shareholders have invested in it.
Price to tangible book is obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to.
Our favorite play is Toronto Dominion Bank (TD) which has a quarterly revenue growth rate of 15.6%, a quarterly earnings growth rate of 57.5%., a ROE of 13%, a five-year dividend growth rate of 8.03%, a five dividend average of 4.3%, a payout ratio of 42%, a three-year total return of 179%, and it has been paying dividends since 1857. It sports a high beta of 1.38, which makes it a good candidate for covered writes. If it is implemented properly, selling covered calls can generate more income than the yearly dividend payments. CL, BNS, TD, BKH and WY are all true dividend champions as they have been paying dividends for decades on end.
Two other plays of interest are YPF SA (YPF) and Black Hills Corporation (BKH), which sport yields of 8.3% and 4.3%, respectively.
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%%, and has been paying dividends since 1942. 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. It's a true dividend champion. A potential negative is that net income has been dropping for three years in a row.
Net income for the past three years
2008 = $105 million
2009 = $ 85 million
2010 = $ 68 million
Total cash flow from operating activities
2008 = $.15 billion
2009 = $.27 billion
2010 = $.15 billion
ROE 5.32%
Return on Assets 3.09%
200 day moving average 31.58
Current Ratio 0.75
Total debt 1.77B
Book value 27.57
Dividend yield 5 year average 4.60%
Dividend rate $1.46
YPF SA (NYSE: YPF has a strong quarterly revenue growth rate of 34.5%, a quarterly earnings growth rate of 14.1%, a ROE of 26.49%, a five year dividend growth rate of 10.25%, and 5 year dividend yield average of 9.8% and has been paying dividends since 1993. Net income has increased for the past 3 years.
It has a levered free cash flow rate of -$236 million, a current ratio of 0.85 and a beta of 1.16. It is a good candidate for a covered write. Selling covered calls opens a potential second stream of income and if implemented properly can generate more revenue than the yearly dividend payment. A negative factor is that the dividend was cut from $1.71 to $1.67.
Net income for the past three years
2008 = $874.67 million
2009 = $971 million
2010 = $1.46 billion
Total cash flow from operating activities
2008 = $3.92 billion
2009 = $2.48 billion
2010 = $3.21 billion
ROE = 26.49%
Return on Assets = 26.49%
200 day moving average = 37.06
Current Ratio = 0.85
Total debt = 2.44B
Book value = 12.22
Qtrly Earnings Growth = 14.1%
Important facts investors should be aware in regards 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 P/E | EBITDA | Quarterly Revenue Growth | Beta | Revenue | Operating Cash flow |
3.40% | 70.60B | 10.3 | N/A | 15.60% | 1.28 | 19.96B | -752.57M | |
3.90% | 58.08B | 10.24 | N/A | 10.50% | 1.20 | 16.08B | 1.05B | |
2.60% | 44.05B | 16.52 | 4.29B | 11.20% | 0.44 | 16.54B | 3.02B | |
3.00% | 11.01B | 47.6 | 995.00M | 3.60% | 1.62 | 6.72B | 424.00M | |
7.00% | 1.58B | 13.56 | N/A | 80.20% | 1.74 | 178.04M | 132.53M |
Toronto Dominion Bank
Industry: Banking
It has a quarterly revenue growth rate of 15% and a quarterly earnings growth rate of 57.5%. It sports a high beta of 1.38 which makes it a good candidate for covered writes. If implemented properly selling covered calls can generate more income than the yearly dividend payments. We would assign TD a four stars out of a possible five.
Net income for the past three years
2009 = $2.9 billion
2010 = $4.57 billion
2011 = $5.93 billion
Total cash flow from operating activities
2009 = $22.88 billion
2010 = $3.03 billion
2011 = $-764 million
Key Ratios
P/E Ratio = 12.1
P/E High - Last 5 Yrs = 20.3
P/E Low - Last 5 Yrs = 8
Price to Sales = 2.58
Price to Book = 1.62
Price to Tangible Book = 2.6
Price to Cash Flow = 12.3
Price to Free Cash Flow = -11.3
Quick Ratio = N.A.
Current Ratio = N.A.
LT Debt to Equity = 0.27
Total Debt to Equity = 0.27
Interest Coverage = 2.3
Inventory Turnover = N.A.
Asset Turnover = 0
ROE = 13.01%
Return on Assets = 0.92%
200 day moving average = 74.46
Current Ratio = N/A
Total debt = 101.48B
Book value = 47.82
Qtrly Earnings Growth = 57.5%
Dividend yield 5 year average = 4.3%
Dividend rate = $ 2.72
Payout ratio = 42%
Dividend growth rate 3 year avg = 3.83%
Dividend growth rate 5 year avg = 8.03%
Consecutive dividend increases = 1 years
Paying dividends since = 1857
Total return last 3 years = 172.92%
Total return last 3 years = 53.38%
Bank of Nova Scotia Halifax
Industry : Banking
It has an operating cash flow of $1.05 billion.Net income has been increasing for the past 3 years in a row. It has an operating cash flow of 1.05 billion, a quarterly earnings growth rate of 12% and a beta of 1.20. We would assign BNS four stars out of a possible five.
Net income for the past three years
2009 = $3.3 billion
2010 = $4.17 billion
2011 = $5.21 billion
Total cash flow from operating activities
2009 = $-10192 million
2010 = $-2820 million
2011 = $1.07 billion
Key Ratios
P/E Ratio = 11.5
P/E High - Last 5 Yrs = 22.5
P/E Low - Last 5 Yrs = 6.3
Price to Sales = 2.17
Price to Book = 2.04
Price to Tangible Book = 2.04
Price to Cash Flow = 11.7
Price to Free Cash Flow = N.A.
Quick Ratio = N.A.
Current Ratio = N.A.
LT Debt to Equity = 0.21
Total Debt to Equity = 0.75
Interest Coverage = 1.8
Inventory Turnover = N.A.
Asset Turnover = 0
ROE = 17.1%
Return on Assets = 0.96%
200 day moving average = 51.9
Current Ratio = N/A
Total debt = 94.19B
Book value = 25.84
Qtrly Earnings Growth = 12%
Dividend yield 5 year average = 4.9%
Dividend rate = $ 2.08
Payout ratio = 51%
Dividend growth rate 3 year avg = 2.38%
Dividend growth rate 5 year avg = 6.06%
Consecutive dividend increases = 1 years
Paying dividends since = 1834
Total return last 3 years = 162.5%
Total return last 3 years = 45.03%
Colgate-Palmolive Co.
Industry : Household & Personal Products
It has a massive levered free cash flow rate of $2.54 billion and a current ratio of 1.03. This is a true dividend champion and we would assign it a full five stars out of a possible five.
Net income for the past three years
2008 = $1.96 billion
2009 = $2.3 billion
2010 = $2.21 billion
Total cash flow from operating activities
2008 = $2.24 billion
2009 = $3.28 billion
2010 = $3.22 billion
Key Ratios
P/E Ratio = 18
P/E High - Last 5 Yrs = 27.3
P/E Low - Last 5 Yrs = 12.5
Price to Sales = 2.62
Price to Book = 16.23
Price to Tangible Book = -29.83
Price to Cash Flow = 15
Price to Free Cash Flow = 50
Quick Ratio = 0.6
Current Ratio = 1
LT Debt to Equity = 1.41
Total Debt to Equity = 1.78
Interest Coverage = 111.8
Inventory Turnover = 5
Asset Turnover = 1.4
ROE = 90.27%
Return on Assets = 20.08%
200 day moving average = 89.04
Current Ratio = 1.03
Total debt = 4.76B
Book value = 5.48
Qtrly Earnings Growth = 3.9%
Dividend yield 5 year average = 2.4%
Dividend rate = $ 2.32
Payout ratio = 47%
Dividend growth rate 3 year avg = 13.3%
Dividend growth rate 5 year avg = 12.7%
Consecutive dividend increases = 49 years
Paying dividends since = 1895
Total return last 3 years = 55.06%
Total return last 3 years = 49.52%
Weyerhaeuser Co.
Industry : REITs
It has a levered free cash flow rate of $424 million, a current ratio of 3.7 and a high beta of 1.62, which makes it a very good candidate for covered writes.
Net income for the past three years
2008 = $-1176 million
2009 = $-545 million
2010 = $1.29 billion
Total cash flow from operating activities
2008 = $-1334 million
2009 = $-162 million
2010 = $744 million
Key Ratios
P/E Ratio = N.A.
P/E High - Last 5 Yrs = N.A.
P/E Low - Last 5 Yrs = N.A.
Price to Sales = 1.69
Price to Book = 2.27
Price to Tangible Book = 2.29
Price to Cash Flow = 11.7
Price to Free Cash Flow = -52.8
Quick Ratio = 1.5
Current Ratio = 2.1
LT Debt to Equity = 0.94
Total Debt to Equity = 0.94
Interest Coverage = 1.4
Inventory Turnover = 10.1
Asset Turnover = 0.5
ROE = 9.22%
Return on Assets = 2.35%
200 day moving average = 16.19M
Current Ratio = 3.71
Total debt = 4.51B
Book value = 8.91
Qtrly Earnings Growth = -85.9%
Dividend yield 5 year average = 26.5%
Dividend rate = $ 0.60
Payout ratio = 15%
Dividend growth rate 3 year avg = 1390.38%
Dividend growth rate 5 year avg = 836.05%
Consecutive dividend increases = 0 years
Paying dividends since = 1933
Total return last 3 years = 70.8%
Total return last 3 years = -30%
AllianceBernstein Holding L P
Industry : Wealth Management
It sports a high beta of 1.7 making it another good candidate for covered writes.
Net income for the past three years
2008 = $244.73 million
2009 = $167.19 million
2010 = $134.16 million
Total cash flow from operating activities
2008 = $-37.08 million
2009 = $133.08 million
2010 = $151.36 million
Key Ratios
P/E Ratio = 10.3
P/E High - Last 5 Yrs = 28
P/E Low - Last 5 Yrs = 4.1
Price to Sales = 8.75
Price to Book = 0.88
Price to Tangible Book = 0.88
Price to Cash Flow = 10.4
Price to Free Cash Flow = 9.1
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 = 0.1
ROE = 8.5%
Return on Assets = 6.34%
200 day moving average = 14.8
Current Ratio = N/A
Total debt = 0
Book value = 16.79
Qtrly Earnings Growth = 121.1%
Dividend yield 5 year average = 9.9%
Dividend rate = $ 1.44
Payout ratio = 109%
Dividend growth rate 3 year avg = -19.35%
Dividend growth rate 5 year avg = -10.4%
Consecutive dividend increases = 0 years
Paying dividends since = 1990
Total return last 3 years = 10.91%
Total return last 3 years = -72.35%
Potential warning
Dividend was cut from 34 cents to 26 cents.
Conclusion
YPF, BNS, TD, WY and AB all sport fairly high betas making them good candidates for covered writes. Selling covered calls can open up a potentially lucrative second stream of income; stocks with high betas usually command higher premiums. One other means of augmenting one's income would be to sell naked puts, but this strategy should only be employed if you are bullish on the stock. If the stock trades below the strike price you will be assigned the shares; your final price will be the strike price minus the premium you were paid. If the shares do not trade below the strike price, you get to keep the premium. In essence, you get paid for waiting.
Long-term investors should wait until the market lets out some steam before committing fresh money to it. It is rather overbought in the short to intermediate time frames. The correction which we were expecting has started to unfold after the SPX hit the suggested price targets we issued over a month ago.
All charts sourced from dividata.com