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We have posted several key ratios on each of the five stocks covered in this article. Investors should familiarize themselves with the some of these ratios as they could prove to be extremely useful and helpful in the selection process. Understanding what these ratios mean could make the difference between spotting a winner or a loser.

Long-term debt-to-equity ratio = is the total long term debt divided by the total equity. The amount of long-term debt a company carries on its balances sheet is very important for it indicates the amount of money a company owes that it doesn't expect to pay off in the next year. A balance sheet which illustrates that long term debt has been decreasing for a few years is a sign that the company is doing well. When debt levels fall, and cash levels increase the balance sheet is said to be improving and vice versa. If a company has too much debt on its books, it could end up being overwhelmed with interest payments and risk having too little working capital which could in the worst case scenario lead to bankruptcy.

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 Splendid Plays With Superb Yields As High As 7.5%.

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. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

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.

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

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 Enterprise Products Is A Great Long-Term Play.

We like two stocks on this list and they are VALE and MWE. However we went with VALE because its 10 year Rate of return was far superior to that of MWE.

Vale S. A. (NYSE: VALE) is our favourite for the following reasons

  1. A huge levered free cash flow rate of $8.55 billion
  2. A very low payout ratio of 23%
  3. A strong 3 and 5 year dividend growth rate of 63.3% and 24%, respectively
  4. A healthy total 3 year rate of return of 79%
  5. A ROE of 29%
  6. A good quick and current ratio of 1.5 and 2.00 respectively
  7. A LT debt to equity of only 0.4
  8. A above average interest coverage of 5.9
  9. After dipping in 2009 net income and cash flow exploded upwards in 2010
  10. Finally 100k invested for 10 years would have grown to a massive $1.3 million

click to enlarge

Important facts investors should be aware in regards to investing in MLPs

Payout ratios are not that important when it comes to MLPs generally 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 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 declared per unit.

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 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 Partnership.

Stock

Dividend Yield (%)

Market Cap

Forward P/E

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

GLP

8.70

482.27M

14.53

80.31M

143.40%

0.59

13.48B

-61.01M

BWP

7.90

5.37B

18.4

646.00M

-1.70%

0.19

1.14B

N/A

MWE

5.20

5.01B

21.46

544.43M

37.10%

0.93

1.47B

446.34M

PAA

5.00

12.68B

17.54

1.56B

22.90%

0.48

34.28B

N/A

VALE

4.60

128.27B

6.42

34.32B

9.10%

1.58

59.31B

24.22B

Global Partners LP (NYSE: GLP)

Industry : Equipment & Services

Levered Free Cash Flow: -69.83M

Net income for the past three years

2008 = $21.06 million

2009 = $34.14 million

2010 = $27.04 million

Total cash flow from operating activities

2008 = $99.22 million

2009 = $-61.13 million

2010 = $-87.2 million

Key Ratios

P/E Ratio = 31.1

P/E High - Last 5 Yrs = 29.9

P/E Low - Last 5 Yrs = 3.4

Price to Sales = 0.04

Price to Book = 1.57

Price to Tangible Book = 1.78

Price to Cash Flow = 10

Price to Free Cash Flow = -4.3

Quick Ratio = 0.7

Current Ratio = 1.7

LT Debt to Equity = 1.07

Total Debt to Equity = 1.74

Interest Coverage = 1.5

Inventory Turnover = 23.4

Asset Turnover = 8.9

ROE = 5.59%

Return on Assets = 2.08%

200 day moving average = 20.51

Total debt = 789.11M

Book value = 14.74

Qtrly Earnings Growth = 237.2%

Dividend yield 5 year average = 9.1%

Dividend rate = $ 2.00

Payout ratio = 270%

Dividend growth rate 3 year avg = 0.85%

Dividend growth rate 5 year avg = 4.02%

Consecutive dividend increases = 2 years

Paying dividends since = 2006

Total return last 3 years = 122.12%

Total return last 5 years = 18.66%

Notes

A great 3 year total return of 122%, a very strong quarterly earnings growth rate of 237%

Boardwalk Pipeline Partners LP (NYSE: BWP)

Industry : Equipment & Services

Free Cash Flow : $285.4 million

Net income for the past three years

2008 = $294 million

2009 = $162.7 million

2010 = $289.4 million

Total cash flow from operating activities

2008 = $350.3 million

2009 = $400.5 million

2010 = $464.7 million

Key Ratios

P/E Ratio = 23.1

P/E High - Last 5 Yrs = 35

P/E Low - Last 5 Yrs = 7.8

Price to Sales = 4.68

Price to Book = 1.65

Price to Tangible Book = 1.74

Price to Cash Flow = 11.4

Price to Free Cash Flow = -41.9

Quick Ratio = 1.1

Current Ratio = 1.3

LT Debt to Equity = 0.98

Total Debt to Equity = 0.98

Interest Coverage = 2.5

Inventory Turnover = 39.4

Asset Turnover = 0.2

ROE = 6.78%

Return on Assets = N/A

200 day moving average = 26.7

Total debt = 3.20B

Book value = 16.04

Qtrly Earnings Growth = -16.1%

Dividend yield 5 year average = 7%

Dividend rate = $ 2.11

Payout ratio = 178%

Dividend growth rate 3 year avg = 3.66%

Dividend growth rate 5 year avg = 10.47%

Consecutive dividend increases = 5 years

Paying dividends since = 2006

Total return last 3 years = 47.48%

Total return last 5 years = 2.12%

Notes

A good 5 year dividend average of 7% and a healthy 5 year dividend growth rate of 10.47%

Mark west Energy Partners L.P. (NYSE: MWE)

Industry : Equipment & Services

Levered Free Cash Flow: -38.18M

Net income for the past three years

2008 = $208.08 million

2009 = $-118.67 million

2010 = $0.47 million

2011= it stands at $131 and could top the $271 mark.

Total cash flow from operating activities

2008 = $227 million

2009 = $223.11 million

2010 = $312.33 million

2011= It stands at $332 and could top the $457 million mark.

Key Ratios

P/E Ratio = 65.9

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

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

Price to Sales = 3.53

Price to Book = 3.61

Price to Tangible Book = 7.15

Price to Cash Flow = 18.2

Price to Free Cash Flow = -10.3

Quick Ratio = 0.8

Current Ratio = 1.1

LT Debt to Equity = 1.07

Total Debt to Equity = 1.07

Interest Coverage = 1.9

Inventory Turnover = 18.5

Asset Turnover = 0.4

ROE = 7.09%

Return on Assets = 6.12%

200 day moving average = 50.93

Total debt = 1.48B

Book value = 17.42

Qtrly Earnings Growth = N/A

Dividend yield 5 year average = 9.5%

Dividend rate = $ 2.86

Payout ratio = 299%

Dividend growth rate 3 year avg = 4.56%

Dividend growth rate 5 year avg = 8.24%

Consecutive dividend increases = 1 years

Paying dividends since = 2002

Total return last 3 years = 461.33%

Total return last 5 years = 128.34%

Notes

Net income after dropping dramatically in 2009 and 2010 is set to explode upwards in 2011; operating cash flow is also set to experience a nice gain in 2011. It has great 5 year dividend average of 9.5% and a good 5 year dividend growth rate of 8.24%. It also sports an excellent 3 year return of 461%.

Plains All American Pipeline, (NYSE: PAA)

Industry : Equipment & Services

Free Cash Flow : $1.54 billion

Net income for the past three years

2008 = $437 million

2009 = $579 million

2010 = $505 million

Total cash flow from operating activities

2008 = $857 million

2009 = $365 million

2010 = $259 million


Key Ratios

P/E Ratio = 19.6

P/E High - Last 5 Yrs = 27.2

P/E Low - Last 5 Yrs = 8.7

Price to Sales = 0.37

Price to Book = 2.47

Price to Tangible Book = 3.71

Price to Cash Flow = 11.3

Price to Free Cash Flow = -114.2

Quick Ratio = 0.7

Current Ratio = 1

LT Debt to Equity = 0.91

Total Debt to Equity = 1.03

Interest Coverage = 4.4

Inventory Turnover = 23.4

Asset Turnover = 2.4

ROE = 18.85%

Return on Assets = 5.62%

200 day moving average = 66.23

Total debt = 5.20B

Book value = 35.04

Qtrly Earnings Growth = 95.8%

Dividend yield 5 year average = 6.7%

Dividend rate = $ 3.97

Payout ratio = 92%

Dividend growth rate 3 year avg = 3.94%

Dividend growth rate 5 year avg = 5.86%

Consecutive dividend increases = 12 years

Paying dividends since = 1999

Total return last 3 years = 133.27%

Total return last 5 years = 83.57%

Notes

It has a very strong quarterly earnings growth rate of 95%, a good 3 year total return of 133% and a very strong free cash flow rate of $1.5 billion. It also sports a good 5 year dividend rate and a 5 year dividend growth rate.

Vale S. A. (NYSE : VALE)

Industry: Non-Precious Metals

Levered Free Cash Flow: 8.55B

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 = 5.1

P/E High - Last 5 Yrs = 30.9

P/E Low - Last 5 Yrs = 3.4

Price to Sales = 2.33

Price to Book = 2.26

Price to Tangible Book = 2.72

Price to Cash Flow = 5

Price to Free Cash Flow = 65.4

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 = 24.79

Total debt = 28.52B

Book value = 15.88

Qtrly Earnings Growth = -25.2%

Dividend yield 5 year average = 2.7%

Dividend rate = $ 1.15

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 = 79.7%

Total return last 5 years = 65.9%

EPS and EPS surprise charts provided by zacks.com; key indicators for VALE provided by Zacks.com.

Source: 5 Materials Plays Sporting Splendid Yields