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Investors should familiarize themselves with the following ratios as they could prove to be extremely useful and helpful in the selection process. Understanding what these ratios mean could make the difference between investing in a champion or a dud.

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.

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. Individuals searching for other ideas might find this article to be of interest 5 Plays With Stellar Payment Histories.

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 dividing them 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.

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. Additional key metrics are addressed in this article Dividend Champs With Tempting Yields As High As 8.3%.

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. Unrelated business income (UBI) above $1,000 per MLP is taxable in an IRA. This information will appear Box 20 in the schedule K-1. UBI is typically a very small number usually well below $1000 and in some cases negative. 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 units. For more information, on this topic investors can visit the National Association of Publicly Traded Partnerships.

Our favorite is Enterprise Products Partners L (NYSE: EPD) and we like it for the following reasons.

  1. ROE= 14.55%
  2. 5 year dividend average= 6.7%
  3. 5 year dividend growth rate= 5.75%
  4. 3 year total return = 148%
  5. Quarterly revenue growth rate= 40%
  6. Consecutive dividend increases = 14 years
  7. Increased its dividend from 60.5 cents to 61.3 cents.

100K invested for 15 years in EPF would have grown to 653,000.

Stock

Dividend Yield

Market Cap

Forward P/E

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

EPD

5.2%

42.05B

21.18

3.68B

40.40%

0.59

42.31B

3.08B

KMP

5.40%

28.42B

33.07

2.61B

4.00%

0.39

8.21B

2.866B

SCCO

7.80%

29.17B

13.6

3.92B

38.80%

1.59

6.65B

2.14B

TEF

10.00%

78.53B

7.95

21.13B

-16.60%

0.99

80.50B

6.4B

NS

7.50%

3.80B

16.99

500.03M

61.40%

0.41

5.84B

283.54M

Enterprise Products Partners L.P.

Industry: Equipment & Services

It has a levered free cash flow rate of $-314 million and a current ratio of 0.83

Net income for the past three years

2008 = $954.03 million

2009 = $204.1 million

2010 = $320.8 million

2011= it stands at $1.32 billion and could top the $1.8 billion mark.

Total cash flow from operating activities

2008 = $1.24 billion

2009 = $2.42 billion

2010 = $2.3 billion

Key Ratios

P/E Ratio = 37.8

P/E High - Last 5 Yrs = 38.5

P/E Low - Last 5 Yrs = 8.6

Price to Sales = 0.98

Price to Book = 3.64

Price to Tangible Book = 5.44

Price to Cash Flow = 26.7

Price to Free Cash Flow = -32.8

Quick Ratio = 0.5

Current Ratio = 0.8

LT Debt to Equity = 1.23

Total Debt to Equity = 1.32

Interest Coverage = 1.7

Inventory Turnover = 29.8

Asset Turnover = 1.4

ROE = 14.55%

Return on Assets = 5.23%

200 day moving average = 43.73

Current Ratio = 0.83

Total debt = 15.40B

Book value = 13.14

Qtrly Earnings Growth = 1174.1%

Dividend yield 5 year average = 6.7%

Dividend rate = $ 2.44

Payout ratio = 188%

Dividend growth rate 3 year avg = 5.48%

Dividend growth rate 5 year avg = 5.75%

Consecutive dividend increases = 14 years

Paying dividends since = 1998

Total return last 3 years = 148.38%

Total return last 5 years = 99.41%

Positive developments

Dividend was increased from 60.5 cents to 61.3 cents.

Kinder Morgan Energy Partners, (NYSE: KMP)

Industry: Equipment & Services

It has a free cash flow rate of $1.75 billion and a current ratio of 0.46

Net income for the past three years

2008 = $1.31 billion

2009 = $1.27 billion

2010 = $1.32 billion

2011= it stands at $824 million and could top the $1.03 billion mark.

Total cash flow from operating activities

2008 = $2.24 billion

2009 = $2.12 billion

2010 = $2.42 billion

Key Ratios

P/E Ratio = 528.8

P/E High - Last 5 Yrs = N.A.

P/E Low - Last 5 Yrs = N.A.

Price to Sales = 2.4

Price to Book = 2.56

Price to Tangible Book = 3.78

Price to Cash Flow = 19.7

Price to Free Cash Flow = -5.9

Quick Ratio = 0.4

Current Ratio = 0.5

LT Debt to Equity = 1.54

Total Debt to Equity = 1.78

Interest Coverage = 3.3

Inventory Turnover = 134.5

Asset Turnover = 0.4

ROE = 17.03%

Return on Assets = 4.54%

200 day moving average = 74.97

Current Ratio = 0.44

Total debt = 13.88B

Book value = 22.45

Qtrly Earnings Growth = 16.1%

Dividend yield 5 year average = 6.5%

Dividend rate = $ 4.61

Payout ratio = 283%

Dividend growth rate 3 year avg = 4.67%

Dividend growth rate 5 year avg = 7.24%

Consecutive dividend increases = 15 years

Paying dividends since = 1992

Total return last 3 years = 97.4%

Total return last 5 years = 111.13%

Positive developments

Dividend was increased from $1.15 to $1.16

Southern Copper Corp (NYSE: SCCO)

Industry : Non-Precious Metals

It has a levered free cash flow rate of $1.53 billion and a current ratio of 4.18. It sports a high beta which makes it a very good candidate for a covered write (selling covered calls).

Net income for the past three years

2008 = $1.41 billion

2009 = $929.39 million

2010 = $1.56 billion

2011= it stands at $1.79 billion and could top the $2.45 billion mark.

Total cash flow from operating activities

2008 = $1.73 billion

2009 = $963.18 million

2010 = $1.93 billion

Key Ratios

P/E Ratio = 12.8

P/E High - Last 5 Yrs = 33.5

P/E Low - Last 5 Yrs = 4.8

Price to Sales = 4.4

Price to Book = 7.11

Price to Tangible Book = 7.31

Price to Cash Flow = 11.3

Price to Free Cash Flow = 290.9

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 = 30.93

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 = $ 2.07

Payout ratio = 81%

Dividend growth rate 3 year avg = 83.09%

Dividend growth rate 5 year avg = -4.33%

Consecutive dividend increases = 0 years

Paying dividends since = 1996

Total return last 3 years = 182.22%

Total return last 5 years = 113.73%

New Development



SCCO announced a change of dividend payment from 70 cents to 19 cents plus a stock dividend of 0.0107 shares per common stock payable Feb 28, to shareholders on Feb 15, 2012. Initially this looks like a negative development because at the current share price which is roughly $35, the payment works out to be 37.45 cents. Add in the 19 cents and you get $56 cents, which is below the last payment of 70 cents but only 6 cents below the August 2011 dividend payment. Now in the short run this might look bad, but for every 1,000 shares you are going to get roughly 11 shares which will pay out further dividends and as the price of the stock rises (and it should rise because commodities markets are still in a long term up trends) the dividend will rise. So in the short run while some might view this as a negative development, in the long run our opinion is that this could potentially be a very bullish development.


Telefonica, S.A. (NYSE: TEF)

Industry : Services

It has a free cash flow rate of $4.2 billion and a current ratio of 0.62

Net income for the past three years

2008 = $11.04 billion

2009 = $11.16 billion

2010 = $13.64 billion

Total cash flow from operating activities

2008 = $23.08 billion

2009 = $23.17 billion

2010 = $22.37 billion

Key Ratios

P/E Ratio = 46.3

P/E High - Last 5 Yrs = 15

P/E Low - Last 5 Yrs = 5.9

Price to Sales = 1.84

Price to Book = 3.31

Price to Tangible Book = -1.75

Price to Cash Flow = 8.9

Price to Free Cash Flow = -49.1

Quick Ratio = 0.6

Current Ratio = 0.6

LT Debt to Equity = 3

Total Debt to Equity = 3.41

Interest Coverage = 2.3

Inventory Turnover = 8.4

Asset Turnover = 0.3

ROE = 15.11%

Return on Assets = 3.15%

200 day moving average = 19.32

Current Ratio = 0.62

Total debt = 80.88B

Book value = 5.26

Qtrly Earnings Growth = N/A

Dividend yield 5 year average = 6.6%

Dividend rate = $ 2.13

Payout ratio = 416%

Dividend growth rate 3 year avg = 28.88%

Dividend growth rate 5 year avg = 21.66%

Consecutive dividend increases = 8 years

Paying dividends since = 1990

Total return last 3 years = 27.16%

Total return last 5 years = 12.92%

Positive developments

Dividend dropped from $1.082 to $1.059

NuStar Energy L.P. (NYSE: NS)

Industry : Refining & Marketing

It has a levered free cash flow rate of $283 million and a current ratio of 1.2

Net income for the past three years

2008 = $254.02 million

2009 = $224.88 million

2010 = $238.97 million

2011= it stands at $191 million and could top the $261 million mark.

Total cash flow from operating activities

2008 = $485.19 million

2009 = $180.59 million

2010 = $362.5 million

Key Ratios

P/E Ratio = 18.5

P/E High - Last 5 Yrs = 26.1

P/E Low - Last 5 Yrs = 6.4

Price to Sales = 0.64

Price to Book = 1.49

Price to Tangible Book = 2.3

Price to Cash Flow = 9.4

Price to Free Cash Flow = -30.6

Quick Ratio = 0.5

Current Ratio = 1.2

LT Debt to Equity = 0.86

Total Debt to Equity = 1.01

Interest Coverage = 4.1

Inventory Turnover = 10.2

Asset Turnover = 1.1

ROE = 9.32%

Return on Assets = 3.81%

200 day moving average = 56.88

Current Ratio = 1.22

Total debt = 2.57B

Book value = 37.98

Qtrly Earnings Growth = -41.4%

Dividend yield 5 year average = 7.3%

Dividend rate = $ 4.36

Payout ratio = 138%

Dividend growth rate 3 year avg = 2.67%

Dividend growth rate 5 year avg = 4.57%

Consecutive dividend increases = 10 years

Paying dividends since = 2001

Total return last 3 years = 43.69%

Total return last 5 years = 34.33%

Conclusion

As we been stating for over a week, the markets are overbought on the short to intermediate time frames and need to let out some steam. We posted targets for the SPX (1305-1325) roughly 7 weeks ago; these targets were hit and surpassed. The charts are now projecting a sharp and short correction. After this the markets are expected to mount a rather strong counter rally. Hence long term players would be best served by waiting for the markets to pull back before opening up new positions.

All dividend history charts sourced from dividata.com and all earning vs expectations graphs sourced from smartmoney.com

Source: 5 Superb Plays With Yields As High As 10%