While the extremely low rate environment and the ongoing economic uncertainty is driving more individuals towards investments that pay out dividends, traders should not simply jump into this segment of the market without understanding what they are getting into. We have provided a list of some of the more important key ratios that we think could prove to be useful during the selection process.
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 5 Plays With Stellar Payment Histories
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
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.
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. Additional key metrics are addressed in this article 5 Dividend Champs With Yields As High As 17%
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
Important facts investors should be aware in regards to investing and REITS
- Payout ratios are not that important when it comes to REITs as they are required by law to pay a majority of their cash flow as dividends. Payout ratios are calculated by dividing the dividend rate by the net income per share, and this is why the payout ratio for REITs is often higher than 100%. The more important ratio to focus on is the cash flow per share. If one focuses on the cash flow, one will see that in most cases, it exceeds the dividend declared per share.
From a conservative perspective General Mills, Inc. (FIS) is our favourite play on this list for the following reasons:
- It has a strong levered free cash flow rate of $1.3 billion
- A five year dividend rate of 2.9%
- A five year dividend growth rate of 10.38%
- Paying dividends since 1898
- It has a total 3 year return of 46.17%
- A very manageable payout ratio of 50%
- A ROE of 22%
- A good interest covered ratio of 5.3
100K would invested in GS for 10 years would have amounted to 181,657.00
From a more aggressive perspective American Capital Agency Corp. (AGNC) is our favourite play and we like it for the following reasons
It has a quarterly revenue growth rate of 320%
It has a quarterly earnings growth rate of 317%
A 3 year dividend growth rate of 37.9%
A ROE of 23.91%,
A quarterly earnings growth rate of 317%,
A total three-year return of 129%
A three-year dividend growth rate of 37.9%
A payout ratio of 78%
100K invested for five years in AGNC would have grown to 243,343
Stock | Dividend Yield (%) | Market Cap | Forward PE | EBITDA | Quarterly Revenue Growth | Beta | Revenue | Operating Cash flow |
HPT | 7.30 | 3.05B | 7.59 | 576.56M | 13.30% | 1.39 | 1.18B | 350.85M |
SUI | 6.10 | 887.87M | 12.47 | 140.73M | 15.10% | 1.62 | 279.95M | 63.44M |
GIS | 3.00 | 25.74B | 14.16 | 3.04B | 13.70% | 0.20 | 15.75B | 2.08B |
VE | 12.20 | 6.13B | 11.65 | 4.81B | 15.50% | 1.71 | 48.38B | 3.95B |
AGNC | 19.10% | 6.6B | 6.05 | 920M | 320.60% | 0.57 | 757.27M | 509.05M |
Hospitality Properties Trust (HPT)
Industry: REITs
Net income for the past three years
2008 = $134 million
2009 = $193.35 million
2010 = $21.36 million
2011= it stands at $152 million and could come in as high as $190 million.
Total cash flow from operating activities
2008 = $375.44 million
2009 = $320.12 million
2010 = $341.45 million
2011= It stands at $248 million and could come in as high as $330 million.
Key Ratios
P/E Ratio = 103.1
P/E High - Last 5 Yrs = N.A.
P/E Low - Last 5 Yrs = N.A.
Price to Sales = 3
Price to Book = 1.26
Price to Tangible Book = 1.26
Price to Cash Flow = 104
Price to Free Cash Flow = 50.9
Quick Ratio = N.A.
Current Ratio = N.A.
LT Debt to Equity = 0.86
Total Debt to Equity = 0.86
Interest Coverage = 1.4
Inventory Turnover = N.A.
Asset Turnover = 0.2
ROE = 2.03%
Return on Assets = 4.15%
200 day moving average = 22.82
Current Ratio = 0.92
Total debt = 2.08B
Book value = 19.69
Qtrly Earnings Growth = -5.4%
Dividend yield 5 year average = 9.6%
Dividend rate = $ 1.80
Payout ratio = 750%
Dividend growth rate 3 year avg = 71.54%
Dividend growth rate 5 year avg = -14.52%
Consecutive dividend increases = 0 years
Paying dividends since = 1995
Total return last 3 years = 114.61%
Total return last 5 years = -25.61%
Notes
Dividend has continuously trended lower since 2007. It has a negative quarterly earnings growth rate. On the positive side net income has surged upwards in 2011.
Sun Communities, Inc. (SUI)
Industry : REITs
It has a levered free cash flow of $66 million, a current ratio of 5.94 and a beta of 1.61 which makes it a good candidate for covered writes.
Net income for the past three years
2008 = $-34.45 million
2009 = $-6.31 million
2010 = $-2.89 million
2011= it stands at $1 million right now
Total cash flow from operating activities
2008 = $43.14 million
2009 = $59.77 million
2010 = $59.13 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 = 4.33
Price to Book = 0
Price to Tangible Book = -11.59
Price to Cash Flow = 1783
Price to Free Cash Flow = -9.5
Quick Ratio = N.A.
Current Ratio = 5.94
LT Debt to Equity = 0
Total Debt to Equity = N.A.
Interest Coverage = 1
Inventory Turnover = N.A.
Asset Turnover = 0.2
ROE = N/A
Return on Assets = 3.44%
200 day moving average = 36.81
Current Ratio = 5.94
Total debt = 1.36B
Book value = -4.67
Qtrly Earnings Growth = N/A
Dividend yield 5 year average = 12.2%
Dividend rate = $ 2.52
Payout ratio = 840%
Paying dividends since = 1993
Total return last 3 years = 306.42%
Total return last 5 years = 68.9%
Notes
Net income has been negative for the past two years and could come in negative for 2011. On the positive side it has a fairly long dividend history and dividend have been rising in general.
General Mills, Inc.
Industry: Food
It has a very healthy levered cash flow of $1.3 billion and a current ratio of 0.8.
Net income for the past three years
2009 = $1.31 billion
2010 = $1.54 billion
2011 = $1.8 billion
Total cash flow from operating activities
2009 = $1.83 billion
2010 = $2.19 billion
2011 = $1.53 billion
Key Ratios
P/E Ratio = 17
P/E High - Last 5 Yrs = 19.3
P/E Low - Last 5 Yrs = 11.4
Price to Sales = 1.64
Price to Book = 3.92
Price to Tangible Book = -4.07
Price to Cash Flow = 12.5
Price to Free Cash Flow = -86.4
Quick Ratio = 0.4
Current Ratio = 0.8
LT Debt to Equity = 0.8
Total Debt to Equity = 1.19
Interest Coverage = 5.3
Inventory Turnover = 5.6
Asset Turnover = 0.8
ROE = 22.78%
Return on Assets = 7.95%
200 day moving average = 10.56M
Current Ratio = 0.78
Total debt = 7.93B
Book value = 10.2
Qtrly Earnings Growth = -27.5%
Dividend yield 5 year average = 2.9%
Dividend rate = $ 1.22
Payout ratio = 50%
Dividend growth rate 3 year avg = 12.29%
Dividend growth rate 5 year avg = 10.38%
Consecutive dividend increases = 8 years
Paying dividends since = 1898
Total return last 3 years = 46.17%
Total return last 5 years = 56.12%
Veolia Environnement (VE)
Industry : Sanitation Services
It has a levered free cash flow rate of $394 million and a beta of 1.71 making it a good candidate for covered writes.
Net income for the past three years
2008 = $571.07 million
2009 = $838 million
2010 = $779.6 million
Total cash flow from operating activities
2008 = $5.29 billion
2009 = $5.17 billion
2010 = $4.64 billion
Key Ratios
P/E Ratio = 7.4
P/E High - Last 5 Yrs = 76.8
P/E Low - Last 5 Yrs = 10.8
Price to Sales = 0.13
Price to Book = 0.56
Price to Tangible Book = -0.88
Price to Cash Flow = 1.6
Price to Free Cash Flow = 1.8
Quick Ratio = 1.1
Current Ratio = 1.1
LT Debt to Equity = 2.26
Total Debt to Equity = 2.87
Interest Coverage = N.A.
Inventory Turnover = N.A.
Asset Turnover = 0
ROE = -0.72%
Return on Assets = 2.47%
200 day moving average = 14.32
Current Ratio = 1.13
Total debt = 27.77B
Book value = 19.21
Qtrly Earnings Growth = N/A
Dividend yield 5 year average = 8.2%
Dividend rate = $ 1.74
Payout ratio = 76%
Dividend growth rate 3 year avg = -13.39%
Dividend growth rate 5 year avg = 9.47%
Consecutive dividend increases = 4 years
Paying dividends since = -2001
Total return last 3 years = -46.33%
Total return last 5 years = -76.34%
Notes
Stock has taken a beating and is attempting to put in a bottom. The worst news maybe already priced in. If it can trade above 15 on a weekly basis the trend will turn bullish and should lead to a test of the 19.50-21.00 ranges.
American Capital Agency Corp
Industry: REITs
It has a free cash flow of $507 million and PEG of 3.06
Net income for the past three years
2008 = $35.36 million
2009 = $118.62 million
2010 = $288.12 million
2011= it stands at $445million and could top the $690 million mark.
Total cash flow from operating activities
2008 = $30.69 million
2009 = $93.23 million
2010 = $-19.62 million
2011= It stands roughly at $305 million.
Key Ratios
P/E Ratio = 4.1
P/E High - Last 5 Yrs = N.A.
P/E Low - Last 5 Yrs = N.A.
Price to Sales = 5.47
Price to Book = 1.08
Price to Tangible Book = 1.08
Price to Cash Flow = 7.6
Price to Free Cash Flow = 115
Quick Ratio = N.A.
Current Ratio = N.A.
LT Debt to Equity = 0
Total Debt to Equity = 0.01
Interest Coverage = 4.2
Inventory Turnover = N.A.
Asset Turnover = 0
ROE = 23.91%
Return on Assets = 2.44%
200 day moving average = 28.32
Current Ratio = 0.11
Total debt = 40.16B
Book value = 26.91
Qtrly Earnings Growth = 317.1%
Dividend yield 5 year average = 0%
Dividend rate = $ 5.60
Payout ratio = 78%
Dividend growth rate 3 year avg = 37.97%
Dividend growth rate 5 year avg = 0%
Consecutive dividend increases = 0 years
Paying dividends since = 2008
Total return last 3 years = 129%
Total return last 5 years = N/A
Notes
On the REITs side this is one of our favourite plays. If it had a longer dividend history we would have labeled it as our favourtie play on the list. AGNC takes a strong second place. 100K invested in AGNC for just 4 years would have amounted to 238,000; this is over 100K more than the returns GIS produced in a 10 year period.
Conclusion
We issued two sets of targets for the SPX; both sets were issued over 8 weeks ago. The first set fell in the 1305-1325 ranges. On the second target, we stated that the SPX could trade as high as 1340 on an intra day basis before a top was in place. The SPX traded as high as 1345 on the 3rd of February; as the markets have a tendency to overshoot it is possible that the SPX could trade higher, but we feel that the odds of a strong pull back are pretty significant and long-term investors would be better off waiting for a pullback before deploying new money into this market. The charts are clearly indicating that this upcoming pull back (the one we are expecting) will prove to be the launch pad for an even stronger counter rally.
This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is very important that you check the finer details, 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.
All dividend history charts sourced from dividata.com and all earning Vs estimation graphs sourced from smartmoney.com
