5 Magnificent Plays Sporting Great Yields As High As 11.10%

|
 |  Includes: BKCC, DTE, OGE, POM, SCCO
by: Tactical Investor

Investing in dividend paying stocks makes sense for the following reasons

  1. A steady income without having to sell your position
  2. Provides you with more financial flexibility.
  3. It's a good hedge against inflation
  4. Cash flow regardless of market direction.
  5. Quicker compounding.
  6. Provides with the two potential sources of income; one from capital gains and the other from the dividends paid out
  7. You can also open up additional streams of income by selling covered calls.
  8. If you are bullish on the stock you can open up an additional stream of income by selling puts.

Traders would also do well to get a handle on some of the following key ratios as they prove to be of tremendous use during the selection process.

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.

Inventory turnover is calculated by dividing sales by inventory. If a company generated $30 million in sales and had an average inventory of $6 million, the inventory turn over would be equal to 5. This value indicates that there are 5 inventory turnovers per year. This means that it takes roughly 2.4 months to sell the inventory. A low inventory turnover is a sign of inefficiency and vice versa.

Asset turnover is calculated by dividing revenue by assets. It measures a company'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 than companies with high profit margins.

Quick ratio or acid -test is obtained by adding cash and cash equivalents plus marketable securities and accounts receivable and dividing them by current liabilities. It is a measure of a company's ability to use its quick assets (assets that can be sold off 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 Interesting Plays With Yields As High As 11.50%."

ROE is obtained by dividing the net income by shareholder 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 a company's value contrary to simply looking at the Market cap.

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 than it is making; this situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, it 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 some time. 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, "6 Great Stocks With Yields As High As 8%."

Despite the dividend cut, and the recent earnings miss we still like Southern Copper Corp (NYSE:SCCO) as the 10-year returns simply trounce all the other names on this list. However, for those who are looking for a lower-risk stock, the alternative would be OGE Energy Corp (OGE).

We like SCCO for the following reasons

A very strong interest coverage ratio of 18.1

A good 5-year dividend average of 6.2%

A strong 3-year dividend growth rate of 83%

A payout ratio that is below 100 (81%)

Even though the dividend was cut, we like the fact that part of the dividend is going to be paid in shares. Going forward this could really add up as the new shares you receive will also pay out dividends (sort of like a mini drip program).

A very strong 3-year total return of 141%

A good current ratio of 4.2

As it sports a fairly high beta it's a good candidate for covered writes

Stock

Dividend Yield (%)

Market Cap

Forward PE

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

DTE

4.30%

9.07B

14.29

2.38B

5.90%

0.64

8.90B

1.80B

SCCO

6.7%

29.41B

13.71

3.92B

38.80%

1.60

6.65B

2.14B

BKCC

11.10

686.58M

9.1

N/A

34.00%

1.52

120.56M

-132.79M

OGE

2.90

5.22B

14.96

939.20M

7.70%

0.77

3.86B

724.30M

POM

5.40

4.52B

15.67

1.04B

-20.50%

0.51

6.20B

799.00M

Click to enlarge

Southern Copper Corp

Industry: Non-Precious Metals

Levered Free Cash Flow: 1.53B

Net income for the past three years

2008 = $1.41 billion

2009 = $929.39 million

2010 = $1.56 billion

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

Total cash flow from operating activities

2008 = $1.73 billion

2009 = $963.18 million

2010 = $1.93 billion

2011= It stands at $1.5 and could top $2 billion.

Key Ratios

P/E Ratio = 12.9

P/E High - Last 5 Yrs = 33.5

P/E Low - Last 5 Yrs = 4.8

Price to Sales = 4.42

Price to Book = 7.16

Price to Tangible Book = 7.36

Price to Cash Flow = 11.4

Price to Free Cash Flow = 292.7

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 = 30.9

Current Ratio = 4.18

Total debt = 2.75B

Book value = 4.89

Qtrly Earnings Growth = 81.6%

Dividend yield 5-year average = 6.2%

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 = 141.07%

Total return last 5 years = 101.12%

Notes

The dividend is actually higher than the 2% some are quoting. The dividend was cut to 19 cents and 0.0107 shares so the actual dividend works out to be roughly 56 cents, which translates to a yield of roughly 6.7%.

It met revenue expectations but missed earnings per share expectations; analysts were expecting a profit of 70.4 cents per share but it turned in 64 cents per share. This is a good long-term play, but it's a volatile stock as its profits are based on the price of copper. We would wait for a stronger pull back before opening up positions. As it sports a nice beta, traders can also sell covered calls to potentially open up another stream of income.

BlackRock Kelso Capital Corp (NASDAQ: BKCC)

Industry : Holding and other Investment Offices

Levered Free Cash Flow: -7.78M

Net income for the past three years

2008 = $-150.51 million

2009 = $67.24 million

2010 = $71.55 million

2011= It stands at $69.9 Million and could top the $82 million mark.

Total cash flow from operating activities

2008 = $16.51 million

2009 = $159.39 million

2010 = $37.84 million

2011= it stands at $-57 million and could top the $-80 million mark.

Key Ratios

P/E Ratio = 9.9

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

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

Price to Sales = 6.29

Price to Book = 0.96

Price to Tangible Book = 0.96

Price to Cash Flow = 9.5

Price to Free Cash Flow = -3.2

Quick Ratio = N.A.

Current Ratio = N.A.

LT Debt to Equity = 0.45

Total Debt to Equity = 0.45

Interest Coverage = 6.3

Inventory Turnover = N.A.

Asset Turnover = 0.1

ROE = 10.7%

Return on Assets = 5.08%

200 day moving average = 8.43

Current Ratio = 2.18

Total debt = 317.45M

Book value = 9.75

Qtrly Earnings Growth = -20.7%

Dividend yield 5-year average = 12.2%

Dividend rate = $ 1.10

Payout ratio = 122%

Dividend growth rate 3 year avg = -2.52%

#VALUE!

Consecutive dividend increases = 0 years

Paying dividends since = 2007

Total return last 3 years = 68.91%

Total return last 5 years = N/A

Notes

Black Rock Kelso Capital Advisors LLC purchased 200, 000 shares in March, at an average price of 10 per share. Director Jerrold Harris purchased 13,000 shares in March and May for an average price of 9.64-9.76 a share. The full list of transactions can be accessed here.

warning

Dividend growth for the past 3 years is a negative, and the payout ratio is above 150%. Total cash flow from operating activities looks set to take a hit in 2011, and could end being negative for the year; it currently stands at $-57 million. It does however sport a good interest coverage ratio of 6.3, and net income has been increasing nicely over the past three years. Only investors willing to take on a bit of extra risk should consider this play, but you could end up being well rewarded for this risk.

OGE Energy Corp. (NYSE: OGE)

Industry : Electric Utilities

Levered Free Cash Flow : -549.35M

Net income for the past three years

2008 = $231.4 million

2009 = $258.3 million

2010 = $295.3 million

2011= It stands at $305 million and could top the $450 million mark.

Total cash flow from operating activities

2008 = $625 million

2009 = $654.5 million

2010 = $782.5 million

2011= It stands at $530 million and could top $800 million.

Key Ratios

P/E Ratio = 8.3

P/E High - Last 5 Yrs = 15.6

P/E Low - Last 5 Yrs = 5.6

Price to Sales = 1.35

Price to Book = 2.05

Price to Tangible Book = 2.05

Price to Cash Flow = 8.2

Price to Free Cash Flow = -9.2

Quick Ratio = 0.5

Current Ratio = 0.8

LT Debt to Equity = 1.02

Total Debt to Equity = 1.13

Interest Coverage = 4

Inventory Turnover = 14.5

Asset Turnover = 0.5

ROE = 14.32%

Return on Assets = 5%

200 day moving average = 51

Current Ratio = 0.78

Total debt = 2.88B

Book value = 25.91

Qtrly Earnings Growth = 9.6%

Dividend yield 5-year average = 3.9%

Dividend rate = $ 1.57

Payout ratio = 23%

Dividend growth rate 3 year avg = 2.79%

Dividend growth rate 5 year avg = 2.13%

Consecutive dividend increases = 5 years

Paying dividends since = 1908

Total return last 3 years = 123.96%

Total return last 5 years = 47.49%

Notes

It has an excellent dividend history, low payout ratio, decent quarterly earnings growth rate of 9.6% and strong 3-year total return of 123%. We would wait for the markets to pull back before jumping into this play. It's a good long-term play.

Pepco Holdings Inc. (NYSE: POM)

Industry : Electric Utilities

Levered Free Cash Flow : -228.25M

Net income for the past three years

2008 = $300 million

2009 = $235 million

2010 = $32 million

2011= It stands at $238 million and could top the $310 mark.

Total cash flow from operating activities

2008 = $413 million

2009 = $606 million

2010 = $813 million

2011= It stands at $531 and could top $729 million.

Key Ratios

P/E Ratio = 16.7

P/E High - Last 5 Yrs = 141.4

P/E Low - Last 5 Yrs = 9.5

Price to Sales = 0.73

Price to Book = 1.04

Price to Tangible Book = 1.53

Price to Cash Flow = 6.4

Price to Free Cash Flow = 3.5

Quick Ratio = 0.6

Current Ratio = 1

LT Debt to Equity = 0.96

Total Debt to Equity = 1.12

Interest Coverage = 2.4

Inventory Turnover = 34

Asset Turnover = 0.4

ROE = 5.86%

Return on Assets = 2.66%

200 day moving average = 19.29

Current Ratio = 0.96

Total debt = 4.86B

Book value = 19.2

Qtrly Earnings Growth = 370.6%

Dividend yield 5 year average = 5.6%

Dividend rate = $ 1.08

Payout ratio = 91%

Dividend growth rate 5 year avg = 0.92%

Consecutive dividend increases = 2 years

Paying dividends since = 1904

Total return last 3 years = 26%

Total return last 5 years = -4.06%

Notes

It has a strong quarterly earnings growth rate of 320%, but a negative quarterly revenue growth rate, a relatively high payout ratio, a weak 5-year dividend growth rate and a negative 5-year total rate of return. While this could still be a good long-term play, we feel there are better opportunities out there in the utilities sector like OGE and DTE.

DTE Energy Co. (NYSE: DTE)

Industry: Electric Utilities

It has a levered free cash flow rate of $135.6 million.

Net income for the past three years

2008 = $546 million

2009 = $532 million

2010 = $630 million

2011= It stands at $560 and could top the $740 million mark.

Total cash flow from operating activities

2008 = $1.57 billion

2009 = $1.82 billion

2010 = $1.83 billion

2011= It stands at $1.5 billion and could top the $1.85 billion mark.

Key Ratios

P/E Ratio = 12.

P/E High - Last 5 Yrs = 20.3

P/E Low - Last 5 Yrs = 7.2

Price to Sales = 1.03

Price to Book = 1.32

Price to Tangible Book = 1.88

Price to Cash Flow = 5.3

Price to Free Cash Flow = 103.20

Quick Ratio = 0.7

Current Ratio = 1.4

LT Debt to Equity = 1.08

Total Debt to Equity = 1.15

Interest Coverage = 2.9

Inventory Turnover = 8.2

Asset Turnover = 0.4

ROE = 10.5%

Return on Assets = 3.67%

200 day moving average = 51.06

Current Ratio = 1.39

Total debt = 8.02B

Book value = 41.18

Qtrly Earnings Growth = 12.3%

Dividend yield 5-year average = 5%

Dividend rate = $ 2.35

Payout ratio = 55%

Dividend growth rate 3 year avg = 3.12%

Dividend growth rate 5 year avg = 2.31%

Consecutive dividend increases = 2 years

Paying dividends since = 1909

Total return last 3 years = 76%

Total return last 5 years = 38%

Notes

Net income and total cash flow from operating activities have both been generally trending upwards for the past 3 years going on 4 soon. It has a decent 5-year dividend rate of 5%, a reasonable payout ratio of 55%, has been paying dividends for a very long time (1909), a decent three total return of 76% and positive quarterly earnings growth rate of 12%.

Conclusion

The markets are overbought, and a top is already in place or in the works. The correction should be sharp and fast; this will be followed by a counter rally that could be potentially even stronger and last for several months before a multi month top takes hold.

All earning estimate and growth charts sourced from dailyfinance.com and all dividend history charts sourced from dividdata.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: 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 in each of the mentioned plays before investing any capital in them. Some investors are happy with taking enormous amounts of risks, while others are bothered by the slightest degree risk; it is imperative that you 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.