5 Dividend Plays: 2 Good And 3 Middle Of The Road

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 |  Includes: BMO, ECA, MFC, RY, SLF
by: Tactical Investor

"The value of a man resides in what he gives and not in what he is capable of receiving."

Albert Einstein

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.

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.

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 pay out 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. Individual investors searching for other ideas might want to see 10 Top Growth Plays Of The Week, Part II.

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 free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa; lower ratios are generally more attractive. If a company generated $400 million in cash flow and then spent $100 million on capital expenditure, then its free flow is $300 million. If the share price is 100 and the free cash flow per share is $5, then the company trades at 20 times free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry; this gives you an idea of how the company you are interested in holds up to the other companies within the industry.

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.

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. Additional key metrics are addressed in this article 2 Good, And 3 Middle Of The Road Dividend Plays

We like Royal Bank Canada (NYSE:RY) for the following reasons:

  • A very strong free cash flow of $24.6 billion
  • It sports a beta of 1.51 which makes it pretty good candidate for covered writes; selling covered provides investors with a potential second stream of income.
  • Net income has increased from $3.3 billion in 2009 to $4.9 billion in 2011.
  • EBITDA has surged from $7.03 billion in 2009 to $12.2 billion in 2011.
  • Cash flow per share has increased from $3.83 in 2009 to $4.81 in 2011.
  • It sports a fair 5 year dividend average of 3.9%
  • A good 5 year dividend growth rate of 8.9%
  • Annual EPS before NRI increased from $3.82 in 2007 to $4.37 in 2011
  • It has a good payout ratio of 49% and a 5 year average payout ratio of 52%
  • A long term debt to equity ratio of 0.27
  • It has an acceptable quick and current ratio of 1.03 and 1.01 respectively.
  • A fair interest coverage ratio of 4.89
  • A 3-5 year estimated EPS growth rate of 10%
  • A decent ROE of 19.35%
  • $100K invested for 10 years would have grown to $259K; if the dividends were reinvested the rate of return would have much higher.

Company : Royal Bank Canada

Free Cash Flow = $24.6 billion

Growth

  1. Net Income ($mil) 12/2011 = 4920
  2. Net Income ($mil) 12/2010 = 5032
  3. Net Income ($mil) 12/2009 = 3312
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = -11.29
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = -1.85
  1. EBITDA ($mil) 12/2011 = 12276
  2. EBITDA ($mil) 12/2010 = 9619
  3. EBITDA ($mil) 12/2009 = 7032
  4. Net Income Reported Quarterlytr ($mil) = 1852
  5. Annual Net Income this Yr/ Net Income last Yr = -2.23
  6. Cash Flow ($/share) 12/2011 = 4.81
  7. Cash Flow ($/share) 12/2010 = 3.98
  8. Cash Flow ($/share) 12/2009 = 3.83
  1. Sales ($mil) 12/2011 = 35115
  2. Sales ($mil) 12/2010 = 35576
  3. Sales ($mil) 12/2009 = 36293
  1. Annual EPS before NRI 12/2007 = 3.82
  2. Annual EPS before NRI 12/2008 = 3.31
  3. Annual EPS before NRI 12/2009 = 3.23
  4. Annual EPS before NRI 12/2010 = 3.5
  5. Annual EPS before NRI 12/2011 = 4.37

Dividend history

  1. Dividend Yield = 3.73
  2. Dividend Yield 5 Year Average = 3.9%
  3. Annual Dividend 12/2011 = 2.09
  4. Annual Dividend 12/2010 = 1.92
  5. Forward Yield = 3.93
  6. Dividend 5 year Growth = 8.53%

Dividend sustainability

  1. Payout Ratio 09/2011 = 0.49
  2. Payout Ratio 06/2011 = 0.47
  3. Payout Ratio 5 Year Average 12/2011 = 0.52
  4. Payout Ratio 5 Year Average 09/2011 = 0.52
  5. Payout Ratio 5 Year Average 06/2011 = 0.51
  6. Change in Payout Ratio = -0.02

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -10.83
  2. Next 3-5 Year Estimate EPS Growth rate = 10
  3. EPS Growth Quarterly(1)/Q(-3) = 102.36
  4. 5 Year History EPS Growth 12/2011 = 2.15
  5. ROE 5 Year Average 12/2011 = 19.35
  6. Return on Investment 12/2011 = 12.8
  7. Debt/Total Cap 5 Year Average 12/2011 = 20.07
  8. Current Ratio 12/2011 = 1.01
  9. Current Ratio 5 Year Average = 0.97
  10. Quick Ratio = 1.03
  11. Cash Ratio = 0.56
  12. Interest Coverage Quarterly = 4.89

Valuation

  1. Book Value Quarterly = 25.8
  2. Price/ Book = 2.25
  3. Price/ Cash Flow = 12.04
  4. Price/ Sales = 2.26
  5. EV/EBITDA 12 Mo = -11.51
  6. R-squared EPS Growth 12/2011 = 0.11
  7. R-squared EPS Growth 09/2011 = 0.11

Notes: It would fall under the category of "good".

Company : Bank Montreal (NYSE:BMO)

Free Cash Flow = $28.4

Basic Key ratios

  1. Percentage Held by Insiders = 1
  2. Market Cap ($mil) = 37681

Growth

  1. Net Income ($mil) 12/2011 = 3312
  2. Net Income ($mil) 12/2010 = 2707
  3. Net Income ($mil) 12/2009 = 1534
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 25.7
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 36.71
  1. EBITDA ($mil) 12/2011 = 6070
  2. EBITDA ($mil) 12/2010 = 4547
  3. EBITDA ($mil) 12/2009 = 3017
  4. Net Income Reported Quarterlytr ($mil) = 1086
  5. Annual Net Income this Yr/ Net Income last Yr = 22.33
  6. Cash Flow ($/share) 12/2011 = 5.91
  7. Cash Flow ($/share) 12/2010 = 5.4
  8. Cash Flow ($/share) 12/2009 = 3.75
  1. Sales ($mil) 12/2011 = 17294
  2. Sales ($mil) 12/2010 = 15371
  3. Sales ($mil) 12/2009 = 14982
  1. Annual EPS before NRI 12/2007 = 5.17
  2. Annual EPS before NRI 12/2008 = 4.37
  3. Annual EPS before NRI 12/2009 = 2.86
  4. Annual EPS before NRI 12/2010 = 4.73
  5. Annual EPS before NRI 12/2011 = 5.19

Dividend history

  1. Dividend Yield = 4.76
  2. Dividend Yield 5 Year Average =5.2%
  3. Annual Dividend 12/2011 = 2.82
  4. Annual Dividend 12/2010 = 3.34
  5. Forward Yield = 4.76
  6. Dividend 5 year Growth =6.9%

Dividend sustainability

  1. Payout Ratio 09/2011 = 0.52
  2. Payout Ratio 06/2011 = 0.5
  3. Payout Ratio 5 Year Average 12/2011 = 0.59
  4. Payout Ratio 5 Year Average 09/2011 = 0.59
  5. Payout Ratio 5 Year Average 06/2011 = 0.58
  6. Change in Payout Ratio = -0.07

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -13.49
  2. Next 3-5 Year Estimate EPS Growth rate = 10
  3. EPS Growth Quarterly(1)/Q(-3) = -106.77
  4. 5 Year History EPS Growth 12/2011 = 1.58
  5. 5 Year History EPS Growth 09/2011 = 1.58
  6. ROE 5 Year Average 12/2011 = 14.7
  7. Return on Investment 12/2011 = 10.73
  8. Debt/Total Cap 5 Year Average 12/2011 = 19.39
  1. Current Ratio 12/2011 = 1.02
  2. Current Ratio 09/2011 = 1.02
  3. Current Ratio 06/2011 = 0.94
  4. Current Ratio 5 Year Average = 0.95
  5. Quick Ratio = 0.94
  6. Cash Ratio = 0.47
  7. Interest Coverage Quarterly = 3.55

Valuation

  1. Book Value Quarterly = 39.28
  2. Price/ Book = 1.5
  3. Price/ Cash Flow = 9.95
  4. Price/ Sales = 2.13
  5. EV/EBITDA 12 Mo = -18.41
  6. R-squared EPS Growth 12/2011 = 0.04
  7. R-squared EPS Growth 09/2011 = 0.04

Notes: It would fall under the category of "good".

Company : Manulife Finl (NYSE:MFC)

Levered Free Cash Flow = 40.95M

Growth

  1. Net Income ($mil) 12/2011 = 130
  2. Net Income ($mil) 12/2010 = -303
  3. Net Income ($mil) 12/2009 = 1250
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 120.09
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = -103.85
  1. EBITDA ($mil) 12/2011 = N/A
  2. EBITDA ($mil) 12/2010 = 128
  3. EBITDA ($mil) 12/2009 = 1011
  4. Net Income Reported Quarterlytr ($mil) = -69
  5. Annual Net Income this Yr/ Net Income last Yr = 142.82
  6. Cash Flow ($/share) 12/2011 = N/A
  7. Cash Flow ($/share) 12/2010 = -0.1
  8. Cash Flow ($/share) 12/2009 = 0.75
  1. Sales ($mil) 12/2011 = 51273
  2. Sales ($mil) 12/2010 = 37841
  3. Sales ($mil) 12/2009 = 37604
  1. Annual EPS before NRI 12/2007 = 2.6
  2. Annual EPS before NRI 12/2008 = 0.32
  3. Annual EPS before NRI 12/2009 = 0.77
  4. Annual EPS before NRI 12/2010 = -0.27
  5. Annual EPS before NRI 12/2011 = 0.02

Dividend history

  1. Dividend Yield = 3.83
  2. Dividend Yield 5 Year Average =3.6%
  3. Annual Dividend 12/2011 = 0.53
  4. Annual Dividend 12/2010 = 0.5
  5. Forward Yield = 3.83
  6. Dividend 5 year Growth = -9.6%

Dividend sustainability

  1. Payout Ratio 09/2011 = N/A
  2. Payout Ratio 5 Year Average 06/2011 = 4.46
  3. Change in Payout Ratio = -3.95

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -27.17
  2. Next 3-5 Year Estimate EPS Growth rate = 10
  3. EPS Growth Quarterly(1)/Q(-3) = -105.95
  4. ROE 5 Year Average 06/2011 = 7.25
  5. Return on Investment 06/2011 = 0.19
  6. Debt/Total Cap 5 Year Average 06/2011 = 11.78
  1. Current Ratio 12/2011 = N/A
  2. Current Ratio 5 Year Average = 6.55
  3. Quick Ratio = 6.77
  4. Cash Ratio = 5.63
  5. Interest Coverage Quarterly = N/A

Valuation

  1. Book Value Quarterly = 13.01
  2. Price/ Book = 1.04
  3. Price/ Sales = 0.47
  4. EV/EBITDA 12 Mo = 178.98

Notes: It would fall under the category of "average".

Company : Sun Life Finl (NYSE:SLF)

Levered Free Cash Flow = -4.87B

Growth

  1. Net Income ($mil) 12/2011 = -186
  2. Net Income ($mil) 12/2010 = 1636
  3. Net Income ($mil) 12/2009 = 547
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = -110.82
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = -192.58
  1. EBITDA ($mil) 12/2011 = -199
  2. EBITDA ($mil) 12/2010 = 2536
  3. EBITDA ($mil) 12/2009 = 510
  4. Net Income Reported Quarterlytr ($mil) = -499
  5. Annual Net Income this Yr/ Net Income last Yr = -111.38
  6. Cash Flow ($/share) 12/2011 = 0.35
  7. Cash Flow ($/share) 12/2010 = 3.12
  8. Cash Flow ($/share) 12/2009 = 1.2
  1. Sales ($mil) 12/2011 = 22649
  2. Sales ($mil) 12/2010 = 24941
  3. Sales ($mil) 12/2009 = 25845
  1. Annual EPS before NRI 12/2007 = 3.72
  2. Annual EPS before NRI 12/2008 = -0.1
  3. Annual EPS before NRI 12/2009 = 0.93
  4. Annual EPS before NRI 12/2010 = 2.79
  5. Annual EPS before NRI 12/2011 = 0.18

Dividend history

  1. Dividend Yield = 6.13
  2. Dividend Yield 5 Year Average 12/2011 = 4.9%
  3. Annual Dividend 12/2011 = 1.49
  4. Annual Dividend 12/2010 = 1.39
  5. Forward Yield = 6.13
  6. Dividend 5 year Growth = 6.82%

Dividend sustainability

  1. Payout Ratio 06/2011 = 6
  2. Payout Ratio 5 Year Average 06/2011 = 1.2
  3. Change in Payout Ratio = 4.8

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -30.17
  2. Next 3-5 Year Estimate EPS Growth rate = 10
  3. EPS Growth Quarterly(1)/Q(-3) = -143.7
  4. ROE 5 Year Average 06/2011 = 8.81
  5. Return on Investment 06/2011 = 1.06
  6. Debt/Total Cap 5 Year Average 06/2011 = 24.79
  1. Current Ratio 12/2011 = N/A
  2. Current Ratio 5 Year Average = 20.41
  3. Interest Coverage Quarterly = N/A

Valuation

  1. Book Value Quarterly = 22.9
  2. Price/ Book = 1.03
  3. Price/ Cash Flow = 67.34
  4. Price/ Sales = 0.6
  5. EV/EBITDA 12 Mo = -62.02

Notes: We would rate this play as "average".

Company : Encana Corp (NYSE:ECA)

Levered Free Cash Flow = -1.31B

Basic Key ratios

Percentage Held by Insiders = 0.26

Market Cap ($mil) = 14847

Growth

  1. Net Income ($mil) 12/2011 = 128
  2. Net Income ($mil) 12/2010 = 1499
  3. Net Income ($mil) 12/2009 = 1862
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = -91.46
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = -485.71
  1. EBITDA ($mil) 12/2011 = 3893
  2. EBITDA ($mil) 12/2010 = 5803
  3. EBITDA ($mil) 12/2009 = 6048
  1. Net Income Reported Quarterlytr ($mil) = -246
  2. Annual Net Income this Yr/ Net Income last Yr = -91.46
  1. Cash Flow ($/share) 12/2011 = 5.2
  2. Cash Flow ($/share) 12/2010 = 5.31
  3. Cash Flow ($/share) 12/2009 = 9.26
  1. Sales ($mil) 12/2011 = 8467
  2. Sales ($mil) 12/2010 = 8870
  3. Sales ($mil) 12/2009 = 11114
  1. Annual EPS before NRI 12/2007 = 5.08
  2. Annual EPS before NRI 12/2008 = 5.87
  3. Annual EPS before NRI 12/2009 = 4.32
  4. Annual EPS before NRI 12/2010 = 0.9
  5. Annual EPS before NRI 12/2011 = 0.54

Dividend history

  1. Dividend Yield = 3.96
  2. Dividend Yield 5 Year Average =3.4%
  3. Annual Dividend 12/2011 = 0.8
  4. Annual Dividend 12/2010 = 0.8
  5. Forward Yield = 3.96
  6. Dividend 5 year Growth = 11.9%

Dividend sustainability

  1. Payout Ratio 06/2011 = 1.21
  2. Payout Ratio 5 Year Average 06/2011 = 0.47
  3. Change in Payout Ratio = 0.74

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -44.68
  2. Next 3-5 Year Estimate EPS Growth rate = -3.5
  3. EPS Growth Quarterly(1)/Q(-3) = 133.33
  4. ROE 5 Year Average 06/2011 = 13.81
  5. Return on Investment 06/2011 = 2.16
  6. Debt/Total Cap 5 Year Average 06/2011 = 28.91
  1. Current Ratio 06/2011 = 1.75
  2. Current Ratio 5 Year Average = 1.14
  3. Quick Ratio = 1.75
  4. Cash Ratio = 1.37
  5. Interest Coverage Quarterly = 3

Valuation

  1. Book Value Quarterly = 22.2
  2. Price/ Book = 0.91
  3. Price/ Cash Flow = 3.89
  4. Price/ Sales = 1.75
  5. EV/EBITDA 12 Mo = 5.58

Notes: We would rate this play in the Average-good range mainly because EPS is projected to decline and net income has been trending downwards for the past three years. It also sports large negative free cash flow rate of -$1.3 billion. Having said that it could make for a good long-term play for those willing to take on some risk; it appears to be putting in a bottom and a weekly close 24.00 will turn the outlook from neutral to bullish.

Conclusion

The markets are extremely overbought, and it would be prudent for long-term investors to wait for a strong pullback before committing large sums of money to this market. Investors looking for additional streams of income can consider the following two options. Sell covered calls or if you are bullish on the stock sell naked put options.

EPS, EPS surprise, broker recommendations, and price and consensus charts sourced from zacks.com. Earning's estimates and growth rate charts sourced from dailyfinance.com. Free cash flow yield, income from cont operations, and revenue growth sourced from Ycharts.com.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: 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