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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.

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. 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: Dividend Kings With Divine Yields.

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.

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.

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.

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: 5 Dividend Stocks With Compelling Yields.

VF Corp. (NYSE:VFC) and Harleysville Group, Inc. (NASDAQ:HGIC) are good plays, but AGNC (NASDAQ:AGNC) achieved the same rate of return in 4 years as opposed to 6-plus years for VFC and HGIC. We like American Capital Agency Corp for the following reasons:

  • Net income exploded upwards from $288 in 2010 to $770 million in 2011.
  • It has a very strong dividend yield of 16.3%
  • A 5 year dividend yield average of 19.21%
  • A strong 3 year total return of 202%
  • A five dividend growth rate of 42%
  • A quick ratio of 1.29
  • A current ratio of 1.29
  • A strong quarterly revenue growth of 69%
  • Now that the government has taken over FNMA and FHLMC, AGNC securities now carry an explicitly government guarantee making it a much more attractive prospect for potential investors.
  • AGNC purchases payer swaptions to protect it against lower rates that might lead to early mortgage prepayments
  • It has paid $18.86 per share in dividends since its public offering in 2008.
  • 100K invested since 2008 would have grown to 236K.

Stock

Dividend Yield (%)

Enterprise Value

Forward PE

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

VFC

2.00

17.74B

13.35

1.44B

36.90%

0.93

9.46B

1.08B

HGIC

2.70

1.54B

21.95

6.84M

-8.70%

-0.16

958.38M

-34.88M

PFE

4.10

175.27B

9.13

27.50B

-4.60%

0.70

67.42B

N/A

PBI

8.30

6.95B

8.72

1.06B

-6.50%

1.01

5.28B

N/A

AGNC

16.30

54.16B

N/A

N/A

64.40%

0.56

850.64M

N/A

VF Corp.

Industry: Apparel, Footwear & Accessories

Levered Free Cash Flow: 254.40M

Net income for the past three years

  • Net Income ($mil) 2009 = $461
  • Net Income ($mil) 2010 = $571
  • Net Income ($mil) 2011 = $888

Total cash flow from operating activities

  • 2009 = $973.49 million
  • 2010 = $1.01 billion
  • 2011 = $1.01 billion

Key Ratios

  • P/E Ratio = 18.2
  • P/E High - Last 5 Yrs = 19.3
  • P/E Low - Last 5 Yrs = 7.1
  • Price to Sales = 1.7
  • Price to Book = 3.53
  • Price to Tangible Book = -26.77
  • Price to Cash Flow = 14.62
  • Price to Free Cash Flow = -7.7
  • Quick Ratio = 1.04
  • Current Ratio = 1.91
  • LT Debt to Equity = 0.41
  • Total Debt to Equity = 0.41
  • Interest Coverage = 14.25
  • Inventory Turnover = 3.6
  • Asset Turnover = 1.01

  • ROE = 20.6%
  • Return on Assests = 10.87%
  • Qtrly Earnings Growth = 374.5%
  • Dividend yield 5 year average = 3.05%

  • Payout ratio = 0.36
  • Dividend growth rate 3 year avg = 3.89%
  • Dividend growth rate 5 year avg = 3.71%
  • Consecutive dividend increases = 39 years
  • Paying dividends since = 1941
  • Total return last 3 years = 187.21%
  • Total return last 5 years = 96.94%

Notes

Net income and operating cash flow have been increasing for the past 3 years. It has a very strong quarterly earnings growth rate of 374%, a very low payout ratio of 36%, a strong 3 year total rate of return of 187% and has consecutively increased dividends for 39 years. It also sports a decent current and quick ratio of 1.91 and 1.04 respectively and has a good interest coverage ratio of 14.25. It is a true dividend champion.

Harleysville Group, Inc.

Industry: General Insurance

Levered Free Cash Flow : -141.90M

Net income for the past three years

  • Net Income ($mil) 2009 = $86
  • Net Income ($mil) 2010 = $67
  • Net Income ($mil) 2011 = $N/A

Total cash flow from operating activities

  • 2008 = $197.03 million
  • 2009 = $105.43 million
  • 2010 = $98.24 million

Key Ratios

  • P/E Ratio = 707.8
  • P/E High - Last 5 Yrs = 35.9
  • P/E Low - Last 5 Yrs = 7.4
  • Price to Sales = 1.61
  • Price to Book = 2.05
  • Price to Tangible Book = 2.05
  • Price to Cash Flow = 19.9
  • Price to Free Cash Flow = -13.2

  • Quick Ratio = 0.19
  • Current Ratio = N/A
  • LT Debt to Equity = 0.16
  • Total Debt to Equity = 0.16
  • Interest Coverage = N/A
  • Inventory Turnover = N/A
  • Asset Turnover = 0.29

  • ROE = -0.96%
  • Return on Assests = -0.22%
  • Qtrly Earnings Growth = N/A
  • Dividend yield 5 year average = 3.51%

  • Payout ratio = N/A
  • Dividend growth rate 3 year avg = 33.17%
  • Dividend growth rate 5 year avg = 14.06%
  • Paying dividends since = 1990
  • Total return last 3 years = 108.36%
  • Total return last 5 years = 83.43%

Notes

Net income and operating cash flow appear to be trending downwards for the past few years and it sports a very weak quick ratio 0.19. On the positive side it sports a strong 5 year dividend growth rate of 14%, a low long term debt/equity of 0.16 and a strong 3 year total return of 108%

Pfizer Inc

Industry: Pharmaceuticals

Free Cash Flow : $19.6 billion

Net income for the past three years

  • Net Income ($mil) 2009 = $8635
  • Net Income ($mil) 2010 = $8257
  • Net Income ($mil) 2011 = $10009

Total cash flow from operating activities

  • 2008 = $18.24 billion
  • 2009 = $16.59 billion
  • 2010 = $11.46 billion

Key Ratios

  • P/E Ratio = 16.6
  • P/E High - Last 5 Yrs = 23.7
  • P/E Low - Last 5 Yrs = 9.4
  • Price to Sales = 2.42
  • Price to Book = 1.83
  • Price to Tangible Book = -14.82
  • Price to Cash Flow = 6.85
  • Price to Free Cash Flow = 13.3

  • Quick Ratio = 1.82
  • Current Ratio = 2.25
  • LT Debt to Equity = 0.39
  • Total Debt to Equity = 0.39
  • Interest Coverage = 4.16
  • Inventory Turnover = 1.78
  • Asset Turnover = 0.34
  • ROE = 20.24%
  • Return on Assests = 9.31%
  • Qtrly Earnings Growth = -50.2%
  • Dividend yield 5 year average = 5.07%

  • Payout ratio = 0.35
  • Dividend growth rate 3 year avg = -8.5%
  • Dividend growth rate 5 year avg = -12.47%
  • Paying dividends since = 1901
  • Total return last 3 years = 70.97%
  • Total return last 5 years = -0.61%

Notes

Net income has been increasing for the past 3 years; it has a low payout ratio of 35%, a good current ratio of 2.25, a decent quick ratio of 1.82 and acceptable interest coverage of 4.16.

Pitney Bowes Inc

Industry: Office Equipment & Furniture

Free Cash Flow: $883 million.

Net income for the past three years

  • Net income ($mil) 2008 = 419
  • Net Income ($mil) 2009 = $423
  • Net Income ($mil) 2010 = $310
  • Net Income ($mil) 2011 = $617

Total cash flow from operating activities

  • 2008 = $990.44 million
  • 2009 = $824.07 million
  • 2010 = $952.12 million

Key Ratios

  • P/E Ratio = 5.9
  • P/E High - Last 5 Yrs = 29.9
  • P/E Low - Last 5 Yrs = 5.7
  • Price to Sales = 0.68
  • Price to Book = N/A
  • Price to Tangible Book = -1.41
  • Price to Cash Flow = 6.1
  • Price to Free Cash Flow = 6.4

  • Quick Ratio = 1
  • Current Ratio = 1.05
  • Total Debt to Equity = -92.93
  • Interest Coverage = 1.30
  • Inventory Turnover = 14.63
  • Asset Turnover = 0.65
  • ROE = N/A%
  • Return on Assests = 5.85%
  • Qtrly Earnings Growth = 308.5%
  • Dividend yield 5 year average = 5.4%
  • Payout ratio = 0.63
  • Dividend growth rate 3 year avg = 1.74%
  • Dividend growth rate 5 year avg = 2.64%
  • Consecutive dividend increases = 30 years
  • Paying dividends since = 1934
  • Total return last 3 years = 8.67%
  • Total return last 5 years = -47.45%

Notes

Net income has been erratic for the past few years. However it does sport a manageable payout ratio of 63% and a strong quarterly earnings growth rate. The 3 year total return is very weak; it has an average quick ratio of 1 and a negative 5 year total rate of return. It has however, consecutively increased dividends for 30 years in a row, and will do whatever it takes to maintain this stellar record.

American Capital Agency Corp

Industry: REITs

Free Cash Flow: $507 million

Net income for the past three years

  • Net Income ($mil) 2009 = $119
  • Net Income ($mil) 2010 = $288
  • Net Income ($mil) 2011 = $770

Total cash flow from operating activities

  • 2008 = $30.69 million
  • 2009 = $93.23 million
  • 2010 = $-19.62 million

Key Ratios

  • P/E Ratio = 6.1
  • P/E High - Last 5 Yrs = N.A.
  • P/E Low - Last 5 Yrs = N.A.
  • Price to Sales = 6.39
  • Price to Book = 1.11
  • Price to Tangible Book = 1.14
  • Price to Cash Flow = 7.43
  • Price to Free Cash Flow = 121.4

  • Quick Ratio = 1.29
  • Current Ratio = 1.29
  • Total Debt to Equity = 7.69
  • Interest Coverage = 1.75
  • Inventory Turnover = N/A
  • Asset Turnover = 0.02
  • ROE = 16.6%
  • Return on Assests = 1.8%
  • Qtrly Earnings Growth = 51.2%
  • Dividend yield 5 year average = 19.21%

  • Payout ratio = 1.07
  • Dividend growth rate 3 year avg = 37.97%
  • Dividend growth rate 5 year avg = 42.59%
  • Paying dividends since = 2008
  • Total return last 3 years = 202.44%

EPS and EPS surprise charts were obtained from zacks.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. 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.

Source: 5 Great Plays With Yields As High As 16.3%