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We are going to take a look at five stocks today, but before we go any further, we would like to go over some key ratios that we feel investors should get a handle on before jumping into stocks that pay dividends.

Enterprise value is a combination of the market cap, debt, minority interests, preferred shares less total cash and cash equivalents. This provides a better picture because it is a more accurate representation of a company's value contrary to simply looking at the Market cap.

Levered free cash flow is the amount of cash available to stockholders 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 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. Individuals searching for other ideas might find this article to be of interest The Highest Paying REITs With Yields As High As 13%

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. There is no fixed ideal number as it depends on the industry the company is in. However, in general a ratio under 1 is acceptable and ideally it should be in the 0.5-0.6 ranges.

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.

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

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 The Highest Yielding REITs With Yields As High As 1...

We like both General Mills (NYSE:GIS) and Colgate(NYSE:CL), but we chose CL over GIS for the following reasons; the 10 year return was better on CL, it has been paying dividends for a longer period of time and has consecutively increased its dividends for almost 50 years.

Colgate-Palmolive Co. (CL) is our favorite choice for the following reasons:

  1. 5 year dividend growth rate of 11.91%
  2. A low payout ratio of 46%
  3. A very strong interest coverage ratio of 111
  4. A stellar dividend history; it has been paying dividends since 1895
  5. Consecutively increased the dividend for 49 years
  6. A total 3 year returns of 48%
  7. A decent LT Debt to Equity ratio of 1.41
  8. A very strong free levered cash flow rate of $2.5 billion

100K invested in Colgate for 10 years would have grown to 184K

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 PE

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

(GIS)

3.1

25.3B

13.94

3.04B

13.70%

0.20

15.75B

2.08B

(CL)

2.50

44.11B

15.46

4.26B

4.90%

0.43

16.73B

2.90B

(NASDAQ:MCHP)

3.60

7.29B

18.82

522.59M

-10.50%

1.08

1.42B

N/A

(NYSE:NRT)

8.10

302.90M

N/A

N/A

13.10%

0.29

25.15M

25.17M

(NYSE:MTR)

7.90

79.76M

N/A

N/A

43.10%

0.83

6.44M

N/A

General Mills, Inc. (GIS)

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%

Notes

Net income has been rising nicely for the past several years, and it has a relatively strong 5 year dividend growth rate of 10.38%. It also sports a good decent interest coverage ratio of 5.3 and a strong levered free cash flow rate of $1.3 billion. This stock is a buy; however, we would wait for strong pullbacks before opening new positions.

Colgate-Palmolive Co.

Industry : Household & Personal Products

Levered Free Cash Flow: $2.30B

Net income for the past three years

2008 = $1.96 billion

2009 = $2.3 billion

2010 = $2.21 billion

2011= It stands at$1.8 billion and could top the $2.4 billion mark.

Total cash flow from operating activities

2008 = $2.24 billion

2009 = $3.28 billion

2010 = $3.22 billion

2011= It stands at $2.05 billion and could come in as high as $3 billion

Key Ratios

P/E Ratio = 18.5

P/E High - Last 5 Yrs = 25.4

P/E Low - Last 5 Yrs = 12.5

Price to Sales = 2.65

Price to Book = 16.61

Price to Tangible Book = -30.53

Price to Cash Flow = 15.4

Price to Free Cash Flow = 143.4

Quick Ratio = 0.6

Current Ratio = 1

LT Debt to Equity = 1.41

Total Debt to Equity = 1.78

Interest Coverage = 111.8

Inventory Turnover = 5

Asset Turnover = 1.4

ROE = 95.33%

Return on Assets = 20.07%

200 day moving average = 89.19

Current Ratio = 1.32

Total debt = 4.81B

Book value = 4.91

Qtrly Earnings Growth = -5.4%

Dividend yield 5 year average = 2.4%

Dividend rate = $ 2.32

Payout ratio = 46%

Dividend growth rate 3 year avg = 13.3%

Dividend growth rate 5 year avg = 11.91%

Consecutive dividend increases = 49 years

Paying dividends since = 1895

Total return last 3 years = 48.63%

Total return last 5 years = 48.77%

Notes

Net income has been trending upwards for the past several years, and it has a very strong levered free cash flow rate of $2.5 billion. It also sports an incredible interest coverage ratio of 111, a decent five year dividend growth rate of 11.9% and a spectacular dividend history; it has been paying dividends since 1895.

Microchip Technology, Inc. (MCHP)

Industry : Semiconductors

It has Free Cash Flow rate of $250 million.

Net income for the past three years

2009 = $245.59 million

2010 = $217.01 million

2011 = $418.95 million

Total cash flow from operating activities

2009 = $308.66 million

2010 = $452.05 million

2011 = $582.67 million

Key Ratios

P/E Ratio = 20.2

P/E High - Last 5 Yrs = 30.3

P/E Low - Last 5 Yrs = 11.9

Price to Sales = 5.16

Price to Book = 3.86

Price to Tangible Book = 4.19

Price to Cash Flow = 14.2

Price to Free Cash Flow = 46.8

Quick Ratio = 5.3

Current Ratio = 6.6

LT Debt to Equity = 0.18

Total Debt to Equity = 0.18

Interest Coverage = 14.4

Inventory Turnover = 2.6

Asset Turnover = 0.5

ROE = 21.54%

Return on Assets = 8.99%

200 day moving average = 34.26

Current Ratio = 7.36

Total debt = 353.34M

Book value = 10.13

Qtrly Earnings Growth = -23.1%

Dividend yield 5 year average = 4.7%

Dividend rate = $ 1.40

Payout ratio = 55%

Dividend growth rate 3 year avg = 3.15%

Dividend growth rate 5 year avg = 9.06%

Consecutive dividend increases = 8 years

Paying dividends since = 2002

Total return last 3 years = 119.41%

Total return last 5 years = 26.74%

Notes

Net income and total cash flow from operating activities have generally been trending upwards for the past few years. It also sports a decent interest coverage ratio of 14, a decent 5 year dividend growth rate of 9% and a very nice three year total return of 119%

Mesa Royalty Trust (NYSE: (MTR)

Industry : Oil Royalty Traders

Levered Free Cash Flow : N/A

Net income for the past three years

2009 = $3.85 million

2010 = $6.53 million

2011= it stands at $4.95 million and could top the $7 million mark.

Total cash flow from operating activities

2009 = $-0.65 million

2010 = $-0.83 million

Key Ratios

P/E Ratio = 13.7

P/E High - Last 5 Yrs = 22.8

P/E Low - Last 5 Yrs = 4.8

Price to Sales = 12.33

Price to Book = 13.24

Price to Tangible Book = 13.24

Price to Cash Flow = 13.1

Price to Free Cash Flow = 61.6

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 = 0.9

ROE = 108.1%

Return on Assets = 52.94%

200 day moving average = 43.22

Current Ratio = 1.42

Total debt = 0

Book value = 3.22

Qtrly Earnings Growth = 45%

Dividend yield 5 year average = 10.1%

Dividend rate = $ 3.07

Payout ratio = 96%

Dividend growth rate 3 year avg = -7.59%

Dividend growth rate 5 year avg = -16.29%

Consecutive dividend increases = 0 years

Paying dividends since = 1990

Total return last 3 years = 46.78%

Total return last 5 years = 13.24%

Notes

Net income has been slowly improving over the past three years but operating cash flow has been declining, and we do not like this development too much; if the cash flow from operating activities is declining it means that the company could have a hard time making its dividend payments. A look at the dividend history illustrates that it has a rather erratic dividend history. On the positive side, quarterly earning's growth is pretty strong (45%). We also do not like the fact that five year dividend growth rate is -16.29%.

North European Oil Royalty Trust (NRT)

Industry : Oil Royalty Traders

Levered Free Cash Flow: 15.84M

Net income for the past three years

2009 = $27.7 million

2010 = $18.72 million

2011 = $24.2 million

Total cash flow from operating activities

2009 = $28.74 million

2010 = $19.66 million

2011 =it stands at $18.8 million and could top the $24 million mark.

Key Ratios

P/E Ratio = 12.5

P/E High - Last 5 Yrs = 16.2

P/E Low - Last 5 Yrs = 5.2

Price to Sales = 11.97

Price to Book = 3349.47

Price to Tangible Book = 3349.47

Price to Cash Flow = 12.4

Price to Free Cash Flow = N.A.

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 = 4.5

ROE = 31195.57%

Return on Assets = 270.14%

200 day moving average = 32.16

Current Ratio = 1.01

Total debt = 0

Book value = 0.01

Qtrly Earnings Growth = 13.5%

Dividend yield 5 year average = 9.2%

Dividend rate = $ 2.74

Payout ratio = 97%

Dividend growth rate 3 year avg = -7.02%

Dividend growth rate 5 year avg = -5.68%

Consecutive dividend increases = 5 years

Paying dividends since = 1990

Total return last 3 years = 44.29%

Total return last 5 years = 21.51%

Warning

While net income and operating cash flow are generally trending upwards, we do not like the fact that the five year dividend growth rate is negative (-5.68%). On the bright side it does sport a positive quarterly earning's growth rate of 13.5% and healthy five year dividend average of 9.2%. However, we would only advise investors willing to taking on extra risk to consider this play.

Conclusion

The markets are extremely overbought in the short to intermediate time frames, and long-term investors would be wise to wait for a pullback before committing fresh money to this market. Use this time to build a list of candidates you would like to purchase in the future. In the mean time one can sell covered calls or naked puts (if one is bullish on the stock) to open up additional streams of income.

Earnings estimates, growth rates, revenue and earnings per share charts sourced from dailyfinance.com. Dividend history charts sourced from dividata.com

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. 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.

Source: An Analysis Of Key Ratios For 5 Dividend Stocks