Seeking Alpha
Profile| Send Message|
( followers)  

Traders should not base their investment decision on yield alone but examine some of the key metrics described below. In most cases, higher yields are associated with a higher degree of risk. It is okay to deploy some capital into riskier plays but betting the house is asking for trouble.

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 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. Individuals searching for other ideas might find this article to be of interest 7 Candidates With Yields As High As 11.5%.

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 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.

Our favourite play on this list though its carries a slightly higher level of risk is Cheniere Energy Partners L P (NYSEMKT:CQP).It has a quarterly revenue growth rate of -2.60%, a ROE of 9.32%, a total three-year return of 306%, and has been paying dividends/distributions since 2007. It has a levered free cash flow rate of $27.63 million, a current ratio of 1.7 and a beta of 0.58. The most important development is that the three new deals which it has landed could add up to additional $1.35 billion in income per year (these deals are explored in more detail further in the article).

Important facts investors should be aware in regards to investing in MLPs

  1. 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.
  2. 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.
  3. 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

APSA

10.00

542.6M

N/A

146.84M

3.30%

0.55

203.55M

131.55M

NRGY

16.43%

2.06B

21.87

364.00M

48.70%

0.46

2.15B

114.40M

UVE*

7.90%

163M

N/A

53.09M

-29.50%

0.15

235.59M

34.87M

CQP

8.00%

3.54B

---

191.17M

-2.6%

0.58

285M

21.82M

FCX

2.2 %

43.7B

8

10.16B

-25.0%

1.61

20.88

6.62B

**= Speculative play

Alto Palermo S.A. (Argentina)

Industry: Property, Real Estate & Development

APSA has a levered free cash flow rate of $83.89 million and a quarterly earnings growth rate of 17.4%

Net income for the past three years

  1. 2008= $-5.8 million
  2. 2009 = $30.2million
  3. 2010= $63.4 million

Total cash flow from operating activities

  1. 2008= $18.8 million
  2. 2009 =$32.9million
  3. 2010 =$110.3 million

Key Ratios

• ROE 26.09%

• Return on assets 13.60%

• 200 day moving average 16.39

• Total debt 168.52M

• Book value 7.24

• Dividend yield 5 year Average 10.20%

• Dividend rate $ 1.86 %

• Payout ratio 344%

• Dividend growth rate 3 year average 38.85%

• Dividend growth rate 5 year average 18.25%

• Consecutive dividend increases 2 years

• Paying dividends since 2003

• Total return last 3 years 340%

• Total return last 5 years 71%

Warning

Dividend was cut from $1.0057 to 85.29 cents.

Inergy L.P.

Industry: Equipment & Services

It has a levered free cash flow of $586 million, a current ratio of 1.38 and has consecutively increased its dividends for 10 years in a row.

Net income for the past three years

  1. 2008= -$57 million
  2. 2009 = $61 million
  3. 2010= $17 million

Total cash flow from operating activities

  1. 2008= $273.9 million
  2. 2009 =$173.6 million
  3. 2010 =$114.4 million
  4. 2011= it currently stands at $95 million

Key Ratios

• ROE -0.92%

• Return on assets 3.33%

• 200 day moving average $26.45

• Total debt 1.85B

• Book value 9.62

• Dividend yield 5 year Average 9.10%

• Dividend rate $2.82 %

• Dividend growth rate 3 year average 4.40%

• Dividend growth rate 5 year average 5.40%

• Consecutive dividend increases 10 years

• Paying dividends since 2001

• Total return last 3 years 12%

• Total return last 5 years 2%

Warning

Net income has been dropping for the 3 years and the total cash flow from operating activities has not been enough to cover the dividend payments for the past 2 years in a row. On the bright side the dividend has been raised continuously 10 years in a row.

Universal Insurance Holdings

Industry: General Insurance

It has a levered free cash flow rate of $163 million and a current ratio of 1.27. The dividend was increased from 8 cents to 14 cents.

Net income for the past three years

  1. 2008= -$40 million
  2. 2009= $28.7 million
  3. 2010= $36.9 million
  4. 2011= it stands at 22.3 and could top the $24.5 million mark.

Total cash flow from operating activities

  1. 2008= $52.8 million
  2. 2009 =$37.3 million
  3. 2010 = -$9.26 million
  4. 2011= It stands at $177 million

Key Ratios

• ROE 19.45%

• Return on assets 3.75%

• 200 day moving average 3.95

• Total debt 56.97M

• Book value 3.92

• Dividend yield 5 year Average 9.20%

• Dividend rate 0.28 %

• Payout ratio 48.00%

• Dividend growth rate 3 year average -10.65%

• Dividend growth rate 5 year average 31.27%

• Consecutive dividend increases 0 years

• Paying dividends since 2001

• Total return last 3 years 50.00%

• Total return last 5 years 48.00%

Positive development

Dividend was increased from 8 cents to 15 cents.

Negative developments

It has a quarterly revenue growth rate of -29% and a terrible earnings growth rate of -92%. Only individuals willing to take on more risk should consider this play.

Cheniere Energy Partners L P

It has a quarterly revenue growth rate of -2.60%, a ROE of 9.32%, a total three-year return of 306%, and has been paying dividends/distributions since 2007. It has a levered free cash flow rate of $27.63 million, a current ratio of 1.7 and a beta of 0.58.

Net income for the past three years

  1. 2008= -$-78 million
  2. 2009= $2186 million
  3. 2010= $107 million
  4. 2011= it stands at $-23.5 million.

Total cash flow from operating activities

  1. 2008= $-1.15 million
  2. 2009 =$234.4 million
  3. 2010 = $104.1 million
  4. 2011= It stands at $13.2 million

Positive developments

Cheniere Energy Partners L P entered into three multibillion dollar contracts one with the BG Group this October valued at $8 billion to supply 3.5 million tons per year of LNG from its Sabine Pass Liquefaction project. The second deal was signed with Spain's gas Natural Fensoa for $9 billion to supply 3.5 million tons of LNG per year for 20 years with the option of extending it for another 10 years.

Cheniere Energy has signed a third long-term deal to export liquefied natural gas from its proposed plant in Louisiana, paving the way for the first U.S. export project of its kind in nearly 50 years. Cheniere will supply state-run Indian energy company Gail India Ltd with 3.5 million tonnes per year (mtpa) of LNG from Sabine Pass for 20 years starting in 2017, pending regulatory approval for the project, the two companies said in a statement. CQP has been bleeding for years and these two deals should help instil some confidence in investors because it provides CQP with means to refinance and or pay off some of its existing debt which is coming due in May 2012. In total these 3 new deals could translate into roughly $1.2-1.35 billion a year in additional income.

  1. Price to sales 12.58
  2. Price to tangible book -6.84
  3. Price to cash flow 152.00
  4. Price to free cash flow -100.00
  5. 5 year sales growth N/A
  6. Inventory turnover 9.30
  7. Asset turnover 0.20

  1. ROE N/A
  2. Return on assets 5.15%
  3. 200 day moving average $16.50
  4. Total debt $2.19B
  5. Book value -$3.09

  1. Dividend yield 5 year Average 11.90%
  2. Dividend rate $1.70
  3. Payout ratio 293%
  4. Dividend growth rate 5 year average N/A
  5. Consecutive dividend increases 0 years
  6. Paying dividends since 2007
  7. Total return last 3 years 306%
  8. Total return last 5 years N/A

Freeport-McMoRan Copper & Gold

It has a ROE of 34.71, a total three-year return of 280%, and it has been paying dividends/distributions since 1994. Total cash flow from operating activities was more than enough to cover dividend payments for 2008, 2009, 2010, and 2011. FCX should have no problem meeting all its dividend obligations for 2012. It has a very strong levered free cash flow rate of $4.27 billion and a current ratio of 3.42.

Net income for the past three years

  1. 2008= -$-11 billion
  2. 2009= $2.5 billion
  3. 2010= $4.2 billion
  4. 2011= it stands at $3.86 billion and could potentially top the $5 billion mark.

Total cash flow from operating activities

  1. 2008= $3.2 billion
  2. 2009 =$4.39 billion
  3. 2010 = $6.27 billion
  4. 2011= It stands at $3.87 billion and could potentially top the $5 billion mark.

  1. Price to sales 2.11
  2. Price to tangible book 2.93
  3. Price to cash flow 6.70
  4. Price to free cash flow 14.60
  5. 5 year sales growth 2070%
  6. Inventory turnover 2.80
  7. Asset turnover 0.70
  8. ROE 34.71%
  9. Return on assets 18.59%
  10. 200 day moving average $41.51
  11. Total debt $3.5B
  12. Book value $16.50

  1. Dividend yield 5 year Average 2.9%
  2. Dividend rate $1.00
  3. Payout ratio 36%
  4. Dividend growth rate 3 year average 400%
  5. Consecutive dividend increases 1 years
  6. Paying dividends since 1994
  7. Total return last 3 years 280%
  8. Total return last 5 years 72%

Conclusion

Our targets posted over a month ago for the SPX have been hit. We also stated that once these targets were hit, the markets would most likely put in an intermediate top. The markets have either put in a top or are in the process of putting in one. Long term traders would thus be best served by waiting for a pullback before deploying new money into this market. As a hedge you can sell covered calls or if you are bullish on a stock sell naked puts; both strategies also help open up additional streams of income.

All dividend charts sourced from dividata.com and price charts were sourced from YahooFinance.

Source: 5 Stocks Sporting Lofty Yields As High As 16%