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Extreme market volatility and economic uncertainty are driving more individuals into stocks that pay dividends. Investors who are new to the concept of dividend investing should take the time to understand the following ratios; they could prove to be immensely useful in the selection process and improve one's odds of choosing winning candidates.

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.

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 that 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. Individuals searching for other ideas might find this article to be of interest Super Stocks Sporting Strong Records And Yields.

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 jeopardizing 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.

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 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.

Clorox Co. (NYSE: CLX) is our play of choice for the following reasons:

  1. It has a decent levered free cash flow of $326 million.
  2. It is one of the world's leading manufacturers of consumer products.
  3. It has made several strategic acquisitions in an effort to increase its market share and product portfolio by expanding into the health and wellness areas. It acquired Aplicare Inc and Health link, both of which provide products to control infections; these two acquisitions build on its previous acquisition of Caltech industries in 2010 towards enhancing its health care portfolio and helping it build a more diversifed income base instead of only relying on its home-business segment.
  4. A 5 year dividend average of 3.07%
  5. A very strong quarterly earnings growth rate of 400%.
  6. A 5 year dividend growth rate of 12.92%.
  7. A 3 year total return of 53%.
  8. It has consecutively increased dividends for 35 years.
  9. It has a relatively low payout ratio of 58%.
  10. Net income and operating cash flow have generally been trending up for the past three years.
  11. A decent interest coverage ratio of 6.1.
  12. 100k invested for 10 years would have grown to 203K.

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Stock

Dividend Yield (%)

Enterprise Value

Forward P/E

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

MCY

5.50

-719.48M

16.22

291.30M

14.30%

0.82

2.78B

158.52M

SYY

3.70

19.73B

14.13

2.33B

9.20%

0.73

41.02B

1.35B

WGL

3.70

3.04B

16.18

312.84M

-8.60%

0.28

2.68B

221.48M

SON

3.60

4.42B

12.58

539.18M

0.20%

0.95

4.50B

245.28M

CLX

3.50

11.49B

15.46

1.08B

3.60%

0.40

5.31B

641.00M

Mercury General Corp. (NYSE: MCY)

Industry : General Insurance

Levered Free Cash Flow: 868.48M

Net income for the past three years

Net Income ($mil) 2009 = $403

Net Income ($mil) 2010 = $152

Net Income ($mil) 2011 = $191

Total cash flow from operating activities

2009 = $189.03 million

2010 = $91.79 million

2011 = $158.53 million

Key Ratios

P/E Ratio = 12.6

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

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

Price to Sales = 0.87

Price to Book = 1.3

Price to Tangible Book = 1.37

Price to Cash Flow = 12.15

Price to Free Cash Flow = 213.7

Quick Ratio = 0.41

Current Ratio = 0.41

LT Debt to Equity = 0.08

Total Debt to Equity = 0.08

Interest Coverage = 122.63

Inventory Turnover = N/A

Asset Turnover = 0.68

ROE = 8.36%

Return on Assests = 3.69%

Qtrly Earnings Growth = N/A

Dividend yield 5 year average = 5.37%

Payout ratio = 0.88

Dividend growth rate 3 year avg = 1.28%

Dividend growth rate 5 year avg = 3.13%

Consecutive dividend increases = 19 years

Paying dividends since = 1990

Total return last 3 years = 65.49%

Total return last 5 years = 2.58%

Notes

It has strong levered free cash flow of $868 million and incredibly strong interest coverage ratio of 122. Its dividend payout ratio is moving to the high side but is still below 100%. On the negative side net income has been dropping and it sports a weak quick and current ratio.

Sysco Corp. (NYSE: SYY)

Industry : Retail - Food & Beverage, Drug & Tobacco

Levered Free Cash Flow: 529.61M

Net income for the past three years

Net Income ($mil) 2009 = $1056

Net Income ($mil) 2010 = $1180

Net Income ($mil) 2011 = $1152

Total cash flow from operating activities

2009 = $1.58 billion

2010 = $885.43 million

2011 = $1.1 billion

Key Ratios

P/E Ratio = 15.1

P/E High - Last 5 Yrs = 23.2

P/E Low - Last 5 Yrs = 10.7

Price to Sales = 0.42

Price to Book = 3.71

Price to Tangible Book = 5.83

Price to Cash Flow = 10.97

Price to Free Cash Flow = -135.7

Quick Ratio = 1.02

Current Ratio = 1.73

LT Debt to Equity = 0.57

Total Debt to Equity = 0.57

Interest Coverage = 15.2

Inventory Turnover = 15.82

Asset Turnover = 3.58

ROE = 25.77%

Return on Assests = 10.4%

Qtrly Earnings Growth = -3.1%

Dividend yield 5 year average = 3.3%

Payout ratio = 0.52

Dividend growth rate 3 year avg = 5.29%

Dividend growth rate 5 year avg = 7.44%

Consecutive dividend increases = 35 years

Paying dividends since = 1970

Total return last 3 years = 42.42%

Total return last 5 years = -0.61%

WGL Holdings, Inc. (NYSE: WGL)

Industry : Gas Utilities

Levered Free Cash Flow : -86.71M

Net income for the past three years

Net Income ($mil) 2009 = $1056

Net Income ($mil) 2010 = $1180

Net Income ($mil) 2011 = $1152

Total cash flow from operating activities

2009 = $308.41 million

2010 = $290.98 million

2011 = $295.69 million

Key Ratios

P/E Ratio = 21.1

P/E High - Last 5 Yrs = 18.4

P/E Low - Last 5 Yrs = 9.4

Price to Sales = 0.42

Price to Book = 3.71

Price to Tangible Book = 1.75

Price to Cash Flow = 10.97

Price to Free Cash Flow = -26.8

Quick Ratio = 1.02

Current Ratio = 1.73

LT Debt to Equity = 0.47

Total Debt to Equity = 0.57

Interest Coverage = 15.2

Inventory Turnover = 15.82

Asset Turnover = 3.58

ROE = 25.77%

Return on Assests = 10.4%

Qtrly Earnings Growth = -22.7%

Dividend yield 5 year average = 3.3%

Payout ratio = 0.52

Dividend growth rate 3 year avg = 2.96%

Dividend growth rate 5 year avg = 7.44%

Consecutive dividend increases = 35 years

Paying dividends since = 1852

Total return last 3 years = 42.37%

Total return last 5 years = 53.51%

Notes

It has a good levered free cash flow rate of $526 million, a good interest coverage ratio of 15.2, a decent 5 year dividend growth rate of 7.44% and manageable payout ratio of only 52% and a stellar history of increasing dividends for 35 years. It also sports a decent current and quick ratio of 1.73 and 1.02 respectively.

Sonoco Products Co. (NYSE: SON)

Industry : Containers & Packaging

Levered Free Cash Flow: 86.96M

Net income for the past three years

Net Income ($mil) 2009 = $151

Net Income ($mil) 2010 = $201

Net Income ($mil) 2011 = $218

Total cash flow from operating activities

2008 = $379.4 million

2009 = $390.99 million

2010 = $375.14 million

Key Ratios

P/E Ratio = 15.2

P/E High - Last 5 Yrs = 22

P/E Low - Last 5 Yrs = 11.1

Price to Sales = 0.72

Price to Book = 2.28

Price to Tangible Book = 5.58

Price to Cash Flow = 7.84

Price to Free Cash Flow = -56.6

Quick Ratio = 1.1

Current Ratio = 1.57

LT Debt to Equity = 0.47

Total Debt to Equity = 0.87

Interest Coverage = 6.26

Inventory Turnover = 9.5

Asset Turnover = 1.13

ROE = 15.25%

Return on Assests = 6.62%

Qtrly Earnings Growth = -14.5%

Dividend yield 5 year average = 3.56%

Payout ratio = 0.51

Dividend growth rate 3 year avg = 2.74%

Dividend growth rate 5 year avg = 2.88%

Consecutive dividend increases = 19 years

Paying dividends since = 1925

Total return last 3 years = 88.97%

Total return last 5 years = 0.18%

Notes

Net income has been increasing for the past 3 years; it has a good payout ratio of only 51%, a decent quarterly earnings growth rate of 14% and has been paying dividends since 1925. It has good current ratio of 1.57, a decent quick ratio of 1.1 and a decent interest coverage ratio of 6.26.

Clorox Co.

Industry : Household & Personal Products

Levered Free Cash Flow: 324.62M

Net income for the past three years

Net Income ($mil) 2009 = $537

Net Income ($mil) 2010 = $603

Net Income ($mil) 2011 = $557

Total cash flow from operating activities

2009 = $738 million

2010 = $819 million

2011 = $698 million

Key Ratios

P/E Ratio = 16.7

P/E High - Last 5 Yrs = 21.3

P/E Low - Last 5 Yrs = 12

Price to Sales = 1.7

Price to Book = N/A

Price to Tangible Book = -4.53

Price to Cash Flow = 9.1

Price to Free Cash Flow = 329.3

Quick Ratio = 0.66

Current Ratio = 0.82

LT Debt to Equity = 0

Total Debt to Equity = -10.4

Interest Coverage = 6.17

Inventory Turnover = 7.26

Asset Turnover = 1.24

ROE = N/A%

Return on Assests = 13.53%

Qtrly Earnings Growth = 400%

Dividend yield 5 year average = 3.07%

Payout ratio = 0.58

Dividend growth rate 3 year avg = 9.7%

Dividend growth rate 5 year avg = 12.92%

Consecutive dividend increases = 35 years

Paying dividends since = 1968

Total return last 3 years = 53.4%

Total return last 5 years = 20.6%

Conclusion

The markets are extremely overbought on the short term time frames, and a strong pull back is well overdue. Long-term investors would be best served by waiting for a strong pullback before deploying large sums of money into this market.

All EPS charts provided by Zacks.com and all dividend history charts were sourced from dividata.com

Source: 5 Dividend Stocks With Compelling Yields