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While the extremely low rate environment and the ongoing economic uncertainty is driving more individuals to seek investments that pay out dividends, new investors would be wise to stop and try to get a handle on some of the key metrics discussed below. These ratios could prove to be very useful in the selection process and potentially keep you out of harm's way.

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. Individuals searching for other ideas might find this article to be of interest: Thompson Creek: A Basic Materials Play Trading Below Book.

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: Philip Morris: A Good Investment With Great Growth Potential.

Stock

Dividend Yield (%)

Enterprise Value

Forward PE

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

MPC

2.40

15.02B

7.45

4.57B

12.50%

0.00

73.58B

3.31B

EPB

5.60

11.22B

15.79

952.00M

2.80%

0.22

1.42B

748.00M

SID

6.70

21.16B

5.75

3.57B

7.40%

1.81

8.97B

1.64B

MVO

7.60

500.80M

N/A

N/A

7.80%

0.71

37.09M

N/A

COP

3.40

119.14B

8.66

31.29B

17.70%

1.15

235.26B

19.65B

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.

Our favorite play is Companhia Siderurgica Nacional, and we like it for the following reasons:

  • It has a strong dividend of 6.7%
  • A decent five year dividend average of 6.10
  • A 5 year dividend growth rate of 8.81
  • Net income and cash flow from operating activities have generally been trending upwards for the past few years.
  • A strong three year and 5 year total return of 81% and 124% respectively
  • A very low payout ratio of 35%
  • A strong quarterly earning's growth rate of 51.6%
  • A good ROE of 31%
  • An excellent current and quick ratio of 4.5 and 2.79 respectively
  • A decent interest coverage ratio of 3.6
  • A good free cash flow yield of 5.4%
  • It's transnordestina railway project is expected to be fully operational by the end of 2012. This will enable it transports over 30 million tonnes of cargo annually in the north eastern part of Brazil. The project is being funded through debt (60%) and capital injections. SID owns 56% of the project. Management expects to realise over 50% in operating margins and roughly a 15% return on this investment. It expects to break even with the four contracts that were signed before the completion of the project. Once this projected is completed it will help improve efficiency because it will now own its own infrastructure for transporting various products such as Iron ore, lime stone, fertilizers, fuels, sugar cane, soybeans, etc.
  • In 2009 it ventured into a new business and began producing and selling cement. Production rose from 338,000 tones in 2009 to 992,000 tons in 2010. It now plans to invest $1 billion to build a Greenfield grinding mil with a capacity of 2.4 million tons and develop Arcos plant with a capacity of 600,000 tons a year and build 3 additional integrated plants with a capacity of 1 million tons per annum by 2013. Total annual production capacity is expected to hit 6.4 million tons of cement once all these facilities are fully operational.
  • 100K would have grown to a massive 1.9 million in 10 years.

Marathon Petroleum Corp. (NYSE:MPC)

Industry: Refining & Marketing

Levered Free Cash Flow: 2.23B

Net income for the past three years

Net Income ($mil) 2009 = $449

Net Income ($mil) 2010 = $623

Net Income ($mil) 2011 = $2389

Total cash flow from operating activities

2010 = $2.22 billion

2011 = $3.31 billion

Key Ratios

P/E Ratio = 6.4

Price to Sales = 0.19

Price to Book = 1.6

Price to Tangible Book = 1.71

Price to Cash Flow = 4.6

Price to Free Cash Flow = 4.8

Quick Ratio = 0.91

Current Ratio = 1.30

LT Debt to Equity = 0.35

Total Debt to Equity = 0.35

Interest Coverage = 62.00

Inventory Turnover = 18.58

Asset Turnover = 3.06

ROE = 25.11%

Return on Assets = 9.56%

Quarterly Earnings Growth = N/A

Payout ratio = 7.00

Dividend growth rate 3 year avg = 0%

Dividend growth rate 5 year avg = N/A%

Consecutive dividend increases = 0 years

Paying dividends since = 2011

Total return last 3 years = N/A

Total return last 5 years = N/A

Notes

Net income has exploded upwards from $449 million in 2009 to $2.8 billion in 2011. It sports a low total debt to equity ratio of 0.35, a very low payout ratio of 7 and an excellent interest coverage ratio of 62.

El Paso Pipeline Partners LP (NYSE:EPB)

Industry: Equipment & Services

Levered Free Cash Flow : 193.00M

Net income for the past three years

Net Income ($mil) 2009 = $318

Net Income ($mil) 2010 = $378

Net Income ($mil) 2011 = $472

Total cash flow from operating activities

2009 = $639 million

2010 = $672 million

2011 = $748 million

Key Ratios

P/E Ratio = 17.7

P/E High - Last 5 Yrs = 197.3

P/E Low - Last 5 Yrs = 9.1

Price to Sales = 5.19

Price to Book = 3.6

Price to Tangible Book = 4.33

Price to Cash Flow = 11.56

Price to Free Cash Flow = 645.9

Quick Ratio = 0.88

Current Ratio = 1.00

LT Debt to Equity = 1.99

Total Debt to Equity = 1.88

Interest Coverage = 2.90

Inventory Turnover = 12.53

Asset Turnover = 0.23

ROE = 21.04%

Return on Assets = 7.1%

Quarterly Earnings Growth = 23.5%

Dividend yield 5 year average = N/A%

Payout ratio = N/A

Dividend growth rate 3 year avg = 17.11%

Dividend growth rate 5 year avg = N/A%

Consecutive dividend increases = 3 years

Paying dividends since = 2008

Total return last 3 years = 143.57%

Total return last 5 years = N/A

Notes

It sports a good levered free cash flow of 193 million and decent quarterly earnings growth of 23.5%. Net income has increased from $318 million in 2009 to $472 million in 2011. Cash flow from operating activities has also been trending upwards nicely for the past 3 years; in 2009 it stood at $639 million and in 2011 it moved up to $748 million

Companhia Siderurgica Nacional (NYSE:SID)

Industry: Non-Precious Metals

Free Cash Flow : $-831 million.

Net income for the past three years

Net Income ($mil) 2009 = $1320

Net Income ($mil) 2010 = $1437

Net Income ($mil) 2011 = $N/A

Total cash flow from operating activities

2008 = $2.07 billion

2009 = $-443.45 million

2010 = $1.5 billion

Key Ratios

P/E Ratio = 4.4

P/E High - Last 5 Yrs = 22.2

P/E Low - Last 5 Yrs = 2.3

Price to Sales = 1.73

Price to Book = 2.71

Price to Tangible Book = 3.41

Price to Cash Flow = 7.44

Price to Free Cash Flow = -8.3

Quick Ratio = 2.79

Current Ratio = 4.5

LT Debt to Equity = 3.05

Total Debt to Equity = 2.89

Interest Coverage = 3.6

Inventory Turnover = 2.04

Asset Turnover = 0.3

ROE = 39.1%

Return on Assets = 7.77%

Quarterly Earnings Growth = 51.6%

Dividend yield 5 year average = 6.10

Payout ratio = 35.00

Dividend growth rate 3 year avg = -1.94%

Dividend growth rate 5 year avg = 8.81

Paying dividends since = 1994

Total return last 3 years = 81.44%

Total return last 5 years = 124.35%

MV Oil Trust (NYSE:MVO)

Industry: Production & Extraction

Levered Free Cash Flow: N/A

Net income for the past three years

Net Income ($mil) 2009 = $18

Net Income ($mil) 2010 = $32

Net Income ($mil) 2011 = $N/A

Key Ratios

P/E Ratio = 13.9

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

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

Price to Sales = 13.51

Price to Book = 14.78

Price to Tangible Book = 14.77

Price to Cash Flow = 15.82

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 = 1.09

ROE = 103.11%

Return on Assets = 103.11%

Quarterly Earnings Growth = 6.7%

Dividend yield 5 year average = N/A%

Payout ratio = 100

Dividend growth rate 3 year avg = 42.95%

Dividend growth rate 5 year avg = N/A%

Paying dividends since = 2007

Total return last 3 years = 472.31%

Total return last 5 years = 130.17%

Notes

Net income has been generally trending upwards for the past few years. It has a strong ROE of 103%, an equally strong 3 year dividend growth rate of 42.9% and a very good 3 year total return of 472%.

ConocoPhillips (NYSE:COP)

Industry: Refining & Marketing

Levered Free Cash Flow: 8.93B

Net income for the past three years

Net Income ($mil) 2009 = $4414

Net Income ($mil) 2010 = $11358

Net Income ($mil) 2011 = $12436

Total cash flow from operating activities

2009 = $12.48 billion

2010 = $17.05 billion

2011 = $19.65 billion

Key Ratios

P/E Ratio = 8.6

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

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

Price to Sales = 0.39

Price to Book = 1.56

Price to Tangible Book = 1.61

Price to Cash Flow = 4.98

Price to Free Cash Flow = 35.9

Quick Ratio = 0.91

Current Ratio = 1.10

LT Debt to Equity = 0.33

Total Debt to Equity = 0.33

Interest Coverage = 24.6

Inventory Turnover = 29.59

Asset Turnover = 1.64

ROE = 17.8%

Return on Assets = 7.75%

Quarterly Earnings Growth = 66.1%

Dividend yield 5 year average = N/A%

Payout ratio = 29%

Dividend growth rate 3 year avg = 12.18%

Dividend growth rate 5 year avg = N/A%

Consecutive dividend increases = 11 years

Paying dividends since = 1934

Total return last 3 years = 137.3%

Total return last 5 years = 30.27%

Notes

It has an incredibly strong levered free cash flow of $8.39 billion. Net income exploded from $4.4 billion in 2009 to $12.4 billion in 2011. The same applies to cash flow from operating activities; in 2009 it stood at $12.48 billion and in 2011 it surged to $19.6 billion.

It has a good LT debt to equity ratio of 0.33, a great quarterly earning's growth rate of 66%, a splendid interest coverage ratio of 29.5, a good 3 year dividend growth rate of 12%, and very low payout ratio of 29%

Conclusion

As the markets are extremely overbought, it would make sense for long term investors to wait for a pullback before committing large sums of money to this market.

Sources: EPS, Price, EPS surprise charts obtained from zacks.com. Free cash flow yield, income from continuing operations and revenue growth charts sourced from Ycharts.com. Earnings estimates and growth rate charts for sourced from dailyfinance.com. A major portion of the historical data used in this article as obtained from zacks.com. Consensus estimate analysis table sourced from reuters.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 Materials Plays With Excellent Yields