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In this series, what we are aiming to do is provide a wealth of key ratios and then pick one of the plays as our favorite play. We will go on to provide some reason for this choice and in doing so, hope to impart some knowledge to those who are new to the field of dividend investing. A lot of ratios will be used in this article, and it would be best for investors to get a handle on some of these ratios, as they could prove to be very useful in the selection process. Some of the more important key ratios are listed below.

We generally base our choice on the following factors:

  • Net income: It should be generally trending upwards for the past 3-4 years.
  • Total cash flow from operating activities: It also should be trending upwards for the past 3-4 years. Payout ratio: It should generally be below 100%, but a ratio below 70% is optimal. Payout ratios are not that important when it comes to MLPS/REITS, as they generally pay a majority of their cash flow as distributions; in the case of REITS, by law, they have to pay out 90% of their cash flow as dividends. 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 and REITS 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, in most cases, it exceeds the distribution/dividend declared per unit/share.
  • Current ratio: It should be above 1
  • Interest coverage ratio: Any value above 1.5 is okay, but we would aim for 2.5-3.00 as our starting range. The higher the number the better
  • Five year dividend average: We generally aim for stocks that have a yield of 4.5% or higher. There are exceptions to this rule. Some stocks appreciate very fast, so even though the yield might be low, one can more than make up the difference through capital gains. Some examples are Jarden (NYSE:JAH), Yamana (NYSE:AUY), Royal Gold (NASDAQ:RGLD), etc.
  • Sales: They should generally be trending upwards for the past 3-4 years.
  • Levered free cash flow: This is the icing on the cake, if a company meets most of the above requirements and also has a positive levered free cash flow; it can generally be viewed as a good long term buy. Two examples are Leggett & Platt (NYSE:LEG) and Procter&Gamble (NYSE:PG).
  • An early warning signal that the company could be in trouble is when the total cash flow generated from operating expenses is not enough to meet the dividend payments. This information can be gleaned by looking at the cash flow statement; this is readily available at yahoo finance. In the example, below we used LEG, and the data was obtained from yahoo finance.

The cash flow in this case was more than enough to easily cover all the dividend payments for all the above years; in this, the time period was from 2008-2010.

Many traders use other metrics, and that is fine; we are just trying to provide a guideline. Later on, when you get better handle on these ratios, you can create your own list of criteria.

Yamana Gold, Inc. (AUY) is our favorite play on this list for the following reasons:

  • An excellent 3 year dividend growth rate of 44%
  • A decent levered free cash flow of $213 million
  • Net income has jumped from $193 million in 2009 to $548 million in 2011.
  • EBITDA has increased from $585 million in 2009 to almost $1.2 billion in 2011.
  • Cash flow from operating activities has increased from $308 million in 2009 to $585 million in 2011.
  • Cash flow per share has almost doubled from $0.79 in 2009 to $1.43 in 2011.
  • It sports decent current and quick ratios of 2.23 and 1.9 respectively.
  • For the first quarter, the growth rate (year over year) is projected at 25%, and for the second quarter, it's projected at 16.44%. For the full year of 2012, it's projected to come in at 20.7% and for 2013, it's projected to jump to 29.5%
  • On the high end, analysts estimate the EPS for 2012 to come in at $1.38, and for 2012, it's expected to surge to $2.17.
  • The payout ratio at 21% is very low; the five year average payout ratio is an excellent 14%
  • It sports an excellent five-year sales growth rate of 55%
  • An incredibly low long-term debt to equity ratio of 0.06
  • A very good interest coverage ratio of 12.38
  • An impressive three year total return of 105%
  • Finally, 100k invested for nine years would have grown to 625K.

Yamana Gold, Inc.

Industry : Precious Metals

Levered Free Cash Flow : 213.70M

Net income for the past three years

Net Income 2009 = $193 million

Net Income 2010 = $451 million

Net Income 2011 = $548 million

EBITDA 12/2011 = $1196 million

EBITDA 12/2010 = $906 million

EBITDA 12/2009 = $585 million

Net income Reported Quarterly = $231 million

Total cash flow from operating activities

2008 = $308.87 million

2009 = $528.03 million

2010 = $613.06 million

Cash Flow 12/2011 = 1.43 $/share

Cash Flow 12/2010 = 1.01 $/share

Cash Flow 12/2009 = 0.79 $/share

Anl EPS before NRI 12/2011 = 0.96

Anl EPS before NRI 12/2010 = 0.61

Anl EPS before NRI 12/2009 = 0.47

Anl EPS before NRI 12/2008 = 0.52

Anl EPS before NRI 12/2007 = 0.53

ROE = 9.67%

Return on Assets = 6.72%

Quarterly Earnings Growth = -28.6%

Quarterly Revenue Growth = 6.3%

Key Ratios

Price to Sales = 5.77

Price to Book = 1.67

Price to Tangible Book = 1.73

Price to Cash Flow = 11.73

Price to Free Cash Flow = 12.2

Current Ratio 09/2011 = 2.23

Current Ratio 5 Year Average = 1.93

Quick Ratio = 1.9

Cash Ratio = 1.48

Interest Coverage 09/2011 = 12.38

Payout Ratio 09/2011 = 0.21

Payout Ratio 06/2011 = 0.19

Payout Ratio 5 Year Avg 09/2011 = 0.14

Payout Ratio 5 Year Avg 06/2011 = 0.14

Change in Payout Ratio = 0.07

Dividend growth rate 3 year avg = 44.95%

Consecutive dividend increases = 2 years

Paying dividends since = 2006

Total return last 3 years = 105.45%

Total return last 5 years = 26.24%

Silvercorp Metals Inc (NYSE:SVM)

Industry : Precious Metals

Levered Free Cash Flow: 57.64M

Net income for the past three years

Net Income 2009 = $-16 million

Net Income 2010 = $39 million

Net Income 2011 = $69 million

EBITDA 12/2011 = $118 million

EBITDA 12/2010 = $65 million

EBITDA 12/2009 = $-8 million

Net income Reported Quarterly = $231 million

Total cash flow from operating activities

2009 = $48.01 million

2010 = $65.26 million

2011 = $104.25 million

Cash Flow 12/2011 = 0.41 $/share

Cash Flow 12/2010 = 0.26 $/share

Cash Flow 12/2009 = 0.21 $/share

Anl EPS before NRI 12/2011 = 0.38

Anl EPS before NRI 12/2010 = 0.24

Anl EPS before NRI 12/2009 = 0.18

Anl EPS before NRI 12/2008 = 0.4

Anl EPS before NRI 12/2007 = 0.44

ROE = 17.12%

Return on Assets = 15.11%

Quarterly Earnings Growth = -31.1%

Quarterly Revenue Growth = 19.4%

Key Ratios

Price to Sales = 5.24

Price to Book = 2.48

Price to Tangible Book = 2.9

Price to Cash Flow = 17.86

Price to Free Cash Flow = 12.7

Current Ratio 09/2011 = 4.09

Current Ratio 5 Year Average = 5.01

Quick Ratio = 5.77

Cash Ratio = 5.66

Interest Coverage = 273

Payout Ratio 09/2011 = 0.21

Payout Ratio 06/2011 = 0.17

Payout Ratio 5 Year Avg 09/2011 = 0.28

Payout Ratio 5 Year Avg 06/2011 = 0.29

Change in Payout Ratio = -0.08

Dividend growth rate 3 year avg = 35.42%

Consecutive dividend increases = 0 years

Paying dividends since = 2007

Total return last 3 years = 246.56%

Total return last 5 years = 49.7%

China Life Insurance Co Ltd (NYSE:LFC)

Industry : Life & Health

Levered Free Cash Flow : 477.04M

Net income for the past three years

Net Income 2009 = $3141 million

Net Income 2009 = $4843 million

Net Income 2010 = $5001 million

EBITDA 12/2010 = $6331 million

EBITDA 12/2009 = $6350 million

Net income Reported Quarterly = $36 million

Total cash flow from operating activities

2008 = $12.44 billion

2009 = $21.93 billion

2010 = $27.11 billion

Cash Flow 12/2010 = 10.57 $/share

Cash Flow 12/2009 = 10.25 $/share

Anl EPS before NRI 12/2010 = 2.7

Anl EPS before NRI 12/2009 = 2.57

Anl EPS before NRI 12/2008 = 1.49

Anl EPS before NRI 12/2007 = 2.85

Quarterly Earnings Growth = -45.7%

Quarterly Revenue Growth = -6.7%

Key Ratios

Price to Book = 0.73

Price to Tangible Book = 2.85

Price to Cash Flow = 3.86

Price to Free Cash Flow = 3.7

Current Ratio 5 Year Average = 4.28

Quick Ratio = 6.42

Cash Ratio = 5.69

Payout Ratio = 0.48

Payout Ratio 5 Year Avg 09/2011 = 1.28

Payout Ratio 5 Year Avg 06/2011 = 1.28

Dividend growth rate 3 year avg = 3.91%

Consecutive dividend increases = 0 years

Paying dividends since = 2006

Total return last 3 years = 7.21%

Total return last 5 years = 7.43%

Mindray Medical International (NYSE:MR)

Industry : Medical Instruments & Equipment

Levered Free Cash Flow: 16.07M

Net income for the past three years

Net Income 2009 = $139 million

Net Income 2010 = $155 million

Net Income 2011 = $167 million

EBITDA 12/2011 = $191 million

EBITDA 12/2010 = $204 million

EBITDA 12/2009 = $201 million

Net income Reported Quarterly = $36 million

Total cash flow from operating activities

2008 = $92.92 million

2009 = $172.25 million

2010 = $147.7 million

Cash Flow 12/2011 = 2.04 $/share

Cash Flow 12/2010 = 2.27 $/share

Cash Flow 12/2009 = 2.19 $/share

Anl EPS before NRI 12/2011 = 1.47

Anl EPS before NRI 12/2010 = 1.39

Anl EPS before NRI 12/2009 = 1.21

Anl EPS before NRI 12/2008 = 1.09

Anl EPS before NRI 12/2007 = 0.73

ROE = 15.75%

Return on Assets = 12.72%

Quarterly Earnings Growth = 14%

Quarterly Revenue Growth = 25.2%

Key Ratios

Price to Sales = 3.16

Price to Book = 2.31

Price to Tangible Book = 4.31

Price to Cash Flow = 15.31

Price to Free Cash Flow = 71.5

5 year sales growth average= 33.8%

Current Ratio 09/2011 = 3.65

Current Ratio 5 Year Average = 3.26

Quick Ratio = 3.28

Cash Ratio = 2.5

Interest Coverage 09/2011 = 116.04

Payout Ratio 09/2011 = 0.18

Payout Ratio 06/2011 = 0.19

Payout Ratio 5 Year Avg 09/2011 = 0.25

Payout Ratio 5 Year Avg 06/2011 = 0.25

Change in Payout Ratio = -0.06

Dividend growth rate 3 year avg = 20.83%

Consecutive dividend increases = 1 years

Paying dividends since = 2007

Total return last 3 years = 68.95%

Total return last 5 years = 28.02%

Company : Firstcity Finl (NASDAQ:FCFC)

Free Cash Flow = $-14.4 million

Basic Key ratios

Percentage Held by Insiders = 18.89

Market Cap ($mil) = 94

Growth

Net Income ($mil) 12/2011 = projected to come in the $11-13 million ranges.

Net Income ($mil) 12/2010 = 13

Net Income ($mil) 12/2009 = 19

Net Income ($mil) 12/2008 = $-46.6

EBITDA ($mil) 12/2010 = 58

EBITDA ($mil) 12/2009 = 47

Cash Flow ($/sh) 12/2010 = 1.25

Cash Flow ($/sh) 12/2009 = 1.62

Sales ($mil) 12/2011 = N/A

Sales ($mil) 12/2010 = 86

Sales ($mil) 12/2009 = 80

Performance

EPS Gr Q(1)/Q(-3) = -130

ROE 5 Yr Avg 09/2011 = 0.69

ROE 5 Yr Avg 06/2011 = 1.14

Return on Investment 06/2011 = 8.5

Debt/

Debt/Tot Cap 5 Yr Avg 09/2011 = 2.7

Debt/Tot Cap 5 Yr Avg 06/2011 = 2.64

Current Ratio 06/2011 = 0.42

Current Ratio 5 Yr Avg = 0.33

Quick Ratio = 0.31

Cash Ratio = 0.16

Interest Coverage 06/2011 = 2.63

Valuation

Book Value Qtr ($/sh) 06/2011 = 12.96

Anl EPS before NRI 12/2007 = 0.19

Anl EPS before NRI 12/2008 = -2.19

Anl EPS before NRI 12/2009 = 1.18

Anl EPS before NRI 12/2010 = 0.84

Price/ Book = 0.7

Price/ Cash Flow = 7.22

Price/ Sales = 1.22

EV/EBITDA 12 Mo = 0.77

Notes

Firstcity Financial would fall under the not-so-great growth play category. Net income has been falling for the past 3 years. It sports a poor current and quick ratio and has a negative free cash flow of $-14.4 million.

Conclusion

The markets are extremely overbought and trending up on rather low volume: This is not a good sign, as the market should trade to new highs on strong volume and not on fumes, as is currently the case. Long-term investors would be best served by waiting for a strong pullback before committing funds to this market.

EPS, Price, EPS surprise charts obtained from zacks.com. Dividend history charts sourced from dividata.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

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: A Look At 5 Growth Plays: 4 Great, 1 Mediocre