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Investors should take the time to understand the following key ratios as many of them have been used in this article; getting a handle on these ratios could prove to be very helpful during the selection process. In addition please read the notes posted under the section that talks about the risks associated with taking a position in a trust.

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 5 Plays With Stellar Payment Histories.

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.

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.

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. Additional key metrics are addressed in this article 5 Plays With Yields As High As 14.0%.

Praxair, Inc. (NYSE: PX) is our favourite play for the following reasons:

  • It has a five year dividend average of 1.9%
  • It has a five dividend growth rate of 14.2%
  • It has consecutively increased dividends for 19 years
  • It has a total 3 year return of 83%
  • A very strong quarterly earnings growth rate of 215%
  • A healthy ROE of 28%
  • A very good interest coverage ratio of 17.7
  • Net income has been trending upwards for the past 4 years

100k invested in PX for 10 years would have grown to 427K

Investors should pay attention to the following risks associated with trusts:

  1. Cash flow is dependent on the price of the underlying commodity and production levels and thus could be subject to swings. If the swings are wide, the dividends paid out could vary widely from year to year.
  2. While investing in royalty trust can yield steady and hefty returns, there is one potential drawback: depletion. These trusts own royalties on a finite amount of resources, and once those resources are gone; the trust is also gone. Investors need to understand that the distributions will eventually decline and disappear. It is essential that you do your due diligence before opening a position in the trusts that are discussed in this article.

Stock

Dividend Yield (%)

Market Cap

Forward P/E

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

TE

4.70

3.87B

12.85

946.30M

-3.20%

0.79

3.34B

754.10M

PX

2.00

32.45B

16.34

3.47B

6.60%

0.85

11.25B

2.46B

ECT

11.50

386.76M

7.66

40.2M

47.80%

0.00

38.09M

N/A

SJT

7.60

865.04M

N/A

64.5M

-6.00%

0.61

65.33M

N/A

HGT

6.50

606.00M

N/A

54.8M

5.30%

0.68

55.68M

N/A

TECO Energy Inc. (NYSE: TE)

Industry: Electric Utilities

Levered Free Cash Flow: $33.60M

Net income for the past three years

2008 = $162.4 million

2009 = $213.9 million

2010 = $239 million

2011= it stands at $219 million and could top the $270 million mark.

Total cash flow from operating activities

2008 = $387.8 million

2009 = $724.7 million

2010 = $664.4 million

Key Ratios

P/E Ratio = 14.3

P/E High - Last 5 Yrs = 28.6

P/E Low - Last 5 Yrs = 8.1

Price to Sales = 1.17

Price to Book = 1.74

Price to Tangible Book = 1.79

Price to Cash Flow = 7.2

Price to Free Cash Flow = 85

Quick Ratio = 0.5

Current Ratio = 0.8

LT Debt to Equity = 1.19

Total Debt to Equity = 1.36

Interest Coverage = 3

Inventory Turnover = 8.1

Asset Turnover = 0.5

ROE = 12.3%

Return on Assets = 5.35%

200 day moving average = 18.12

Current Ratio = 0.78

Total debt = 3.07B

Book value = 10.6

Qtrly Earnings Growth = -6.2%

Dividend yield 5 year average = 5.1%

Dividend rate = $ 0.86

Payout ratio = 66%

Dividend growth rate 3 year avg = 2.27%

Dividend growth rate 5 year avg = 1.8%

Consecutive dividend increases = 9 years

Paying dividends since = 1900

Total return last 3 years = 72.55%

Total return last 5 years = 32.17%

Notes

It has been paying dividends for a very long time. After taking a hit in 2003 dividends are in an uptrend again. Net income has generally been rising for the past 4 years.

Praxair, Inc.

Industry : Specialty Chemicals

Levered Free Cash Flow: 583.50M

Net income for the past three years

2008 = $1.22 billion

2009 = $1.26 billion

2010 = $1.2 billion

2011= it stands at $1.2 billion and could top the $1.6 billion mark.

Total cash flow from operating activities

2008 = $2.04 billion

2009 = $2.17 billion

2010 = $1.91 billion

2011= It stands at$1.6 billon and could top the $2.45 billion mark.

Key Ratios

P/E Ratio = 19.8

P/E High - Last 5 Yrs = 26.2

P/E Low - Last 5 Yrs = 12.5

Price to Sales = 2.88

Price to Book = 5.63

Price to Tangible Book = 9.05

Price to Cash Flow = 13.6

Price to Free Cash Flow = -76.2

Quick Ratio = 0.9

Current Ratio = 1.2

LT Debt to Equity = 1.01

Total Debt to Equity = 1.1

Interest Coverage = 17.4

Inventory Turnover = 15

Asset Turnover = 0.7

ROE = 28.32%

Return on Assets = 9.76%

200 day moving average = 100.94

Current Ratio = 1.03

Total debt = 6.56B

Book value = 18.32

Qtrly Earnings Growth = 215.8%

Dividend yield 5 year average = 1.9%

Dividend rate = $ 2.20

Payout ratio = 37%

Dividend growth rate 3 year avg = 10.09%

Dividend growth rate 5 year avg = 14.29%

Consecutive dividend increases = 19 years

Paying dividends since = 1992

Total return last 3 years = 83.11%

Total return last 5 years = 84.52%

ECA Marcellus Trust I (NYSE: ECT)

Industry: Holding and other Investment Offices

Net income

2010 = $8.81 million

2011= it stands at $31 million and could top the $41 million mark.

Key Ratios

P/E Ratio = 9.6

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

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

Price to Sales = 9.12

Price to Book = 1.23

Price to Tangible Book = 1.23

Price to Cash Flow = 9.6

Price to Free Cash Flow = N.A.

Quick Ratio = 0.7

Current Ratio = 1

LT Debt to Equity = 0

Total Debt to Equity = 0

Interest Coverage = 65536

Inventory Turnover = N.A.

Asset Turnover = 0.1

ROE = N/A

Return on Assets = N/A

200 day moving average = 25.5

Current Ratio = 1.46

Total debt = 0

Book value = 17.83

Qtrly Earnings Growth = 49.4%

Dividend yield 5 year average = 0%

Dividend rate = $ 2.29

Payout ratio = 91%

Dividend growth rate 3 year avg = 0%

Dividend growth rate 5 year avg =

Consecutive dividend increases = 1 years

Paying dividends since = 2010

Total return last 3 years = N/A

Total return last 5 years = N/A

Notes

This is a very new trust but net income is set to jump significantly in 2011 and it does sport a strong quarterly earnings growth rate. Only individuals willing to take on a bit of risk should consider this play. Make sure you understand how trusts function before you initiate a position.

San Juan Basin Royalty Trust (NYSE: SJT)

Industry : Production & Extraction

Levered Free Cash Flow : N/A

Net income for the past three years

2008 = $143.09 million

2009 = $30.18 million

2010 = $78.36 million

2011= it stands at $48 million and could top the $65 million mark.

Key Ratios

P/E Ratio = 13.6

P/E High - Last 5 Yrs = 50.4

P/E Low - Last 5 Yrs = 7.2

Price to Sales = 13.27

Price to Book = 64.58

Price to Tangible Book = 64.58

Price to Cash Flow = 13.6

Price to Free Cash Flow = -449.1

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 = 3.1

ROE = 447.66%

Return on Assets = 184.99%

200 day moving average = 23.12

Current Ratio = 1.02

Total debt = 0

Book value = 0.29

Qtrly Earnings Growth = -6.3%

Dividend yield 5 year average = 8.1%

Dividend rate = $ 1.47

Payout ratio = 100%

Dividend growth rate 3 year avg = 11.75%

Dividend growth rate 5 year avg = -18%

Consecutive dividend increases = 0 years

Paying dividends since = 1990

Total return last 3 years = 24.68%

Total return last 5 years = -15.89%

Warning

Dividend growth rate for the past 5 years is negative and net income is on course to decline for third year in a row. It also has an erratic dividend history. Only individuals willing to take on extra risk should consider this play.

Hugoton Royalty Trust (NYSE: HGT)

Industry : Production & Extraction

Net income for the past three years

2008 = $116.5 million

2009 = $29.31 million

2010 = $62.03 million

2011= it stands at $43 million and could top the $58 million mark.

Key Ratios

P/E Ratio = 11

P/E High - Last 5 Yrs = 26.1

P/E Low - Last 5 Yrs = 4.8

Price to Sales = 10.86

Price to Book = 5.14

Price to Tangible Book = 5.14

Price to Cash Flow = 11

Price to Free Cash Flow = -31.6

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 = 0.4

ROE = 44.63%

Return on Assets = 26.74%

200 day moving average = 20.58

Current Ratio = 1

Total debt = 0

Book value = 2.94

Qtrly Earnings Growth = 5.5%

Dividend yield 5 year average = 10.1%

Dividend rate = $ 1.39

Payout ratio = 100%

Dividend growth rate 3 year avg = 0.79%

Dividend growth rate 5 year avg = -13.37%

Consecutive dividend increases = 0 years

Paying dividends since = 1999

Total return last 3 years = 51.99%

Total return last 5 years = -7.1%

Warning

Net income for the past two years is over 50% below its 2008 peak. It also has 5 year dividend growth rate of -13% and a very erratic dividend history.

All charts sourced from dividata.com

Source: 5 Interesting Plays With Yields As High As 11.50%