While the extremely low rate environment and the ongoing economic uncertainty is driving more individuals to seek investments that pay out dividends, new investors would be wise to stop and try to get a handle on some of the key metrics discussed below. These ratios could prove to be very useful in the selection process and potentially keep you out of harm's way.
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.
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. Additional key metrics are addressed in this article 5 Dividend Stocks With Yields As High As 7.8%.
Price to cash flow ratio is obtained by dividing the share price by cash flow per share. It is a measure of the market's expectations of a company's future financial health. The effects of depreciation and other non cash factors are removed, and this makes it easier for investors to assess foreign companies in the same industry. This ratio also provides a measure of relative value like the price to earning's ratio.
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.
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 5 Plays With Stellar Payment Histories.
Our favourite play on the list is Philip Morris International In (NYSE: PM) and we like it for the following reasons.
- It has a 3 year dividend growth rate of 23.2%
- It has a quarterly earnings growth of 30.5%
- It has a quarterly revenue growth of 26.4%
- Has been paying dividends since 2008 and has consecutively increased them from day 1.
- It has a total 3 year return of 119%
- It has a ROE of 178%
- It has a very good interest coverage ratio of 15.5
- Net income is on course to increase for 4 years in a row. Net income for 2011 stands at roughly $6.7 billion and could top the $9 billion mark.
- Finally it has a very strong levered free cash flow of $9.6 billion
100K invested in PM for 4 years would have grown to 173,027.04
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Key data investors should be aware of in regard to investing in MLPs and REITS.
- Payout ratios are not that important when it comes to MLPS/REITS 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 and REITS 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/dividend declared per unit/share.
- 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 is taxable in an IRA. This information will appear in 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.
Stock | Dividend Yield | Market Cap | Forward P/E | EBITDA | Quarterly Revenue Growth | Beta | Revenue | Operating Cash flow |
13.00 | 2.14B | 7.3 | 386M | 79.00% | 0.24 | 262.20M | 258.58M | |
6.50% | 136.75B | 6.9 | 34.08B | 9.10% | 1.57 | 58.90B | 24.05B | |
3.90% | 29.3B | 16.8 | 4.61B | 12.40% | 0.77 | 8.81B | 3.80B | |
4.00% | 133.09B | 14.7 | 14.22B | 26.40% | 0.93 | 30.46B | 11.15B | |
7.80% | 23.10B | 14.6 | 5.54B | 162.90% | 0.73 | 12.42B | 4.04B |
Hatteras Financial Corp (NYSE: HTS)
Industry : REITs
Net income for the past three years
2008 = $79.13 million
2009 = $174.4 million
2010 = $169.5 million
2011= it stands at $168 million and could come in as high as $246 million
Total cash flow from operating activities
2008 = $77.32 million
2009 = $181.79 million
2010 = $176.27 million
Key Ratios
P/E Ratio = 6.8
P/E High - Last 5 Yrs = N.A.
P/E Low - Last 5 Yrs = N.A.
Price to Sales = 5.22
Price to Book = 1.04
Price to Tangible Book = 1.04
Price to Cash Flow = 8.1
Price to Free Cash Flow = 73.5
Quick Ratio = N.A.
Current Ratio = N.A.
LT Debt to Equity = 0
Total Debt to Equity = 0
Interest Coverage = 3
Inventory Turnover = N.A.
Asset Turnover = 0
ROE = 16.19%
Return on Assets = 1.96%
200 day moving average = 3.74M
Current Ratio = 0.04
Total debt = 16.12B
Book value = 26.32
Qtrly Earnings Growth = 82.7%
Dividend yield 5 year average = 0%
Dividend rate = $ 3.90
Payout ratio = 97%
Dividend growth rate 3 year avg = 15.71%
Dividend growth rate 5 year avg = 0%
Consecutive dividend increases = 0 years
Paying dividends since = 2008
Total return last 3 years = 62.94%
Total return last 5 years = N/A
Warning
Divided was cut from $1.00 to 90 cents. On the positive side Net income for 2011 could top that of 2010 by as much as $76 million.
Vale S. A. (NYSE: VALE)
Industry: Non-Precious Metals
It has a very strong levered free cash flow rate of $8.45 billion and a current ratio of 2.15. It also sports a high beta which makes it a very good candidate for covered writes.
Net income for the past three years
2008 = $13.22 billion
2009 = $5.35 billion
2010 = $17.27 billion
Total cash flow from operating activities
2008 = $17.12 billion
2009 = $7.14 billion
2010 = $19.67 billion
Key Ratios
P/E Ratio = 5
P/E High - Last 5 Yrs = 30.9
P/E Low - Last 5 Yrs = 3.4
Price to Sales = 2.28
Price to Book = 2.21
Price to Tangible Book = 2.66
Price to Cash Flow = 4.9
Price to Free Cash Flow = 63.9
Quick Ratio = 1.5
Current Ratio = 2.1
LT Debt to Equity = 0.4
Total Debt to Equity = 0.43
Interest Coverage = 5.9
Inventory Turnover = 4
Asset Turnover = 0.5
ROE = 29.63%
Return on Assets = 14.55%
200 day moving average = 25.33
Current Ratio = 2.15
Total debt = 28.32B
Book value = 15.76
Qtrly Earnings Growth = -25.2%
Dividend yield 5 year average = 2.5%
Dividend rate = $ 0.03
Payout ratio = 23%
Dividend growth rate 3 year avg = 63.3%
Dividend growth rate 5 year avg = 24.26%
Consecutive dividend increases = 2 years
Paying dividends since = 2002
Total return last 3 years = 92.95%
Total return last 5 years = 72.17%
Notes
It proposed a 50% increase in its minimum dividend payout this year. It stated it would distribute at least $60 billion to shareholders as in comparison to the $4 billion pay-out initially proposed in 2011(which works out to $1.18 per share) in two installments. The first installment will be in April and the second in Oct. This is also a very good long term play and it was really hard to choose between PM and VALE; ideally it would pay to own both these companies.
TransCanada Corp (NYSE: TRP)
Industry : Equipment & Services
It has a levered free cash flow rate of $-643 million.
Net income for the past three years
2008 = $1.2 billion
2009 = $1.32 billion
2010 = $1.28 billion
Total cash flow from operating activities
2008 = $2.33 billion
2009 = $2.86 billion
2010 = $3.11 billion
Key Ratios
P/E Ratio = 19.9
P/E High - Last 5 Yrs = 21.7
P/E Low - Last 5 Yrs = 10
Price to Sales = 3.2
Price to Book = 1.88
Price to Tangible Book = 2.88
Price to Cash Flow = 9.9
Price to Free Cash Flow = -34.4
Quick Ratio = 0.3
Current Ratio = 0.5
LT Debt to Equity = 1.17
Total Debt to Equity = 1.24
Interest Coverage = 3.2
Inventory Turnover = 6.2
Asset Turnover = 0.2
ROE = 8.75%
Return on Assets = 4.15%
200 day moving average = 41.62
Current Ratio = 0.53
Total debt = 21.80B
Book value = 22.85
Qtrly Earnings Growth = 1.5%
Dividend yield 5 year average = 3.80%
Dividend rate = $ 1.68
Payout ratio = 84%
Dividend growth rate 5 year avg = 8.01%
Consecutive dividend increases = 8 years
Paying dividends since = 1964
Philip Morris International In
Industry: Tobacco Products
It has a very strong levered free cash flow rate of $9.62 billion.
Net income for the past three years
2008 = 6.89 billion
2009 = 6.34 billion
2010 = 7.25 billion
2011= It stands at $6.7 billion and could top the $9 billion mark.
Total cash flow from operating activities
2008 = 7.935 billion
2009 = 7.884 billion
2010 = 9.437 billion
Key Ratios
- P/E Ratio=16.20
- Price to Sales= 4.37
- Price to Book= 62.48
- Price to Tangible Book= -11.34
- Price to Cash Flow= 14.10
- Price to Free Cash Flow=23.70
- Quick Ratio=0.4
- Current Ratio=0.9
- LT Debt to Equity=6.04
- Total Debt to Equity=8.34
- Interest Coverage=15.5
- Inventory Turnover=1.2
- Asset Turnover= 0.8
- ROE 178.87%
- Return on Assets 22.62%
- 200 day moving average 71.11
- Current Ratio 0.94
- Total debt 17.76B
- Book value 1.22
- Qtrly Earnings Growth 30.50%
- Dividend yield 5 year average 0.00%
- Dividend rate$ 3.08 %
- Payout ratio 60.00%
- Dividend growth rate 3 year average 23.32%
- Dividend growth rate 5 year average ----
- Consecutive dividend increases 4 years
- Paying dividends since 2008
- Total return last 3 years 119%
- Total return last 5 years N/A %
CenturyLink, Inc. (NYSE: CTL)
Industry : Services
It has a levered free cash flow or $3.22 billion and a current ratio of 0.80
Net income for the past three years
2008 = $365.74 million
2009 = $647.22 million
2010 = $947.71 million
2011= it stands at $466 million and could top the $616 million mark.
Total cash flow from operating activities
2008 = $853.3 million
2009 = $1.58 billion
2010 = $2.05 billion
2011= it stands at $3.48billion and could top the $4.6 billion mark.
Key Ratios
P/E Ratio = 20.2
P/E High - Last 5 Yrs = 15
P/E Low - Last 5 Yrs = 4.5
Price to Sales = 1.84
Price to Book = 1.04
Price to Tangible Book = -7.6
Price to Cash Flow = 6
Price to Free Cash Flow = -72.1
Quick Ratio = 0.7
Current Ratio = 0.8
LT Debt to Equity = 0.96
Total Debt to Equity = 1.01
Interest Coverage = 2.3
Inventory Turnover = 281.3
Asset Turnover = 0.3
ROE = 4.38%
Return on Assets = 3.8%
200 day moving average = 35.59
Current Ratio = 0.8
Total debt = 22.18B
Book value = 35.59
Qtrly Earnings Growth = -39.7%
Dividend yield 5 year average = 6.3%
Dividend rate = $ 2.90
Payout ratio = 158%
Dividend growth rate 3 year avg = 10.92%
Dividend growth rate 5 year avg = 76.44%
Paying dividends since = 1974
Total return last 3 years = 68.13%
Total return last 5 years = 7.18%
Notes
It has a very strong levered free cash flow rate of $3.22 billion and total cash flows from operating activities have been on the rise for the past 3 years and going on four soon.
Conclusion
The markets are rather overbought, long term investors would do well to wait for a strong pull back before committing large sums of money to this market. We had issued two targets for the SPX over 8 week ago; both the targets have now been satisfied. The first target fell in the 1305-1325 ranges. For the second target we stated that the SPX could trade as high as 1340; on Friday it traded as high as 1345 surpassing our target by 5 points. Note that once again we issued these targets here on SA well over 8 weeks before they were hit. After this pull back the markets are expected to mount a rather strong counter rally.
All charts sourced from dividata.com
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
