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Wise spending is part of wise investing. And it's never too late to start. -- Rhonda Katz

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 payout ratio over 100% indicates that the company is paying out more money to shareholders than 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 2 Good, And 3 Middle Of The Road Dividend Plays

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 are $5, then 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 10 Top Growth Plays Of The Week, Part II

Our favorite play on the list is Royal Gold, Inc. (NASDAQ:RGLD), and we like it for the following reasons:

  • A positive levered free cash flow of $5.13 million
  • Net income has almost doubled since 2009; in 2011 it stood at $71 million compared to $38 million in 2009.
  • It boosts a strong dividend three year growth rate of 18.42%
  • A low long term debt to equity ratio of 0.18
  • A good fiver year EPS growth rate of 14.35%
  • A good quarterly earnings and revenue growth rate of 27% and 22% respectively.
  • It sports a great quick and current ratio of 5.5 and 5.87 respectively
  • It has an excellent interest coverage ratio of 25
  • A strong five year sales growth of 41%
  • EBTIDA has increased from $97 million in 2009 to $191 million in 2011
  • Cash flow from operating activities has surged almost 500% from its 2009 levels of $30.5 million in comparison to the 2011 figure of $146 million.
  • Cash flow per share has doubled from $1.25 in 2009 to $2.55 in 2011
  • It has consecutively increased the dividend for 10 years
  • A strong total 5 year total return of 110%
  • A decent free cash flow yield of 4.5%
  • A low payout ratio of 28%
  • 100K invested for 10 years would have grown into a whopping $1.34 million.

Royal Gold, Inc.

Industry: Precious Metals

Levered Free Cash Flow: 5.13M

Growth

  1. Net income for the past three years
  2. Net Income 2009 = $38 million
  3. Net Income 2010 = $21 million
  4. Net Income 2011 = $71 million
  1. EBITDA 12/2011 = $191 million
  2. EBITDA 12/2010 = $101 million
  3. EBITDA 12/2009 = $97 million
  4. Net income Reported Quarterly = $231 million
  1. Total cash flow from operating activities
  2. 2009 = $30.05 million
  3. 2010 = $48.38 million
  4. 2011 = $146.96 million
  1. Cash Flow 12/2011 = 2.55 $/share
  2. Cash Flow 12/2010 = 1.7 $/share
  3. Cash Flow 12/2009 = 1.25 $/share
  1. Anl EPS before NRI 12/2011 = 1.29
  2. Anl EPS before NRI 12/2010 = 0.82
  3. Anl EPS before NRI 12/2009 = 0.52
  4. Anl EPS before NRI 12/2008 = 0.84
  5. Anl EPS before NRI 12/2007 = 0.79

Performance

  1. ROE = 5.92%
  2. Return on Assets = 4.6%
  3. Quarterly Earnings Growth = 27.8%
  4. Quarterly Revenue Growth = 22.2%
  1. Key Ratios
  2. Price to Sales = 15.87
  3. Price to Book = 2.42
  4. Price to Tangible Book = 2.64
  5. Price to Cash Flow = 26.22
  6. Price to Free Cash Flow = -213.5
  1. Current Ratio 09/2011 = 5.5
  2. Current Ratio 5 Year Average = 17.39
  3. Quick Ratio = 5.87
  4. Cash Ratio = 4.17
  5. Interest Coverage 09/2011 = 24.94
  6. Total return last 3 years = 78.15%
  7. Total return last 5 years = 120.09%

Dividend sustainability and history

  1. Payout Ratio 09/2011 = 0.28
  2. Payout Ratio 06/2011 = 0.3
  3. Payout Ratio 5 Year Avg 09/2011 = 0.41
  4. Payout Ratio 5 Year Avg 06/2011 = 0.41
  5. Change in Payout Ratio = -0.13
  1. Dividend growth rate 3 year avg = 18.42%
  2. Consecutive dividend increases = 10 years
  3. Paying dividends since = 2000

Notes

We would rate it as "excellent."

Varian Medical Systems, Inc. (NYSE:VAR)

Industry: Medical Instruments & Equipment

Levered Free Cash Flow: 301.75M

Growth

  1. Net income for the past three years
  2. Net Income 2009 = $319 million
  3. Net Income 2010 = $360 million
  4. Net Income 2011 = $399 million
  1. EBITDA 12/2011 = $644 million
  2. EBITDA 12/2010 = $585 million
  3. EBITDA 12/2009 = $523 million
  4. Net income Reported Quarterly = $90 million
  1. Total cash flow from operating activities
  2. 2009 = $304.44 million
  3. 2010 = $460.79 million
  4. 2011 = $472.78 million
  1. Cash Flow 12/2011 = 3.94 $/share
  2. Cash Flow 12/2010 = 3.42 $/share
  3. Cash Flow 12/2009 = 3 $/share
  1. Annual EPS before NRI 12/2011 = 3.44
  2. Annual EPS before NRI 12/2010 = 2.96
  3. Annual EPS before NRI 12/2009 = 2.65
  4. Annual EPS before NRI 12/2008 = 2.31
  5. Annual EPS before NRI 12/2007 = 1.85

Performance

  1. ROE = 29.95%
  2. Return on Assets = 15.99%
  3. Quarterly Earnings Growth = -6.5%
  4. Quarterly Revenue Growth = 7.8%
  1. Price to Sales = 2.96
  2. Price to Book = 5.73
  3. Price to Tangible Book = 6.82
  4. Price to Cash Flow = 17.58
  5. Price to Free Cash Flow = 25
  1. Current Ratio 09/2011 = 1.75
  2. Current Ratio 5 Year Average = 1.83
  3. Quick Ratio = 1.28
  4. Cash Ratio = 0.72
  5. Interest Coverage 09/2011 = 158.61
  1. Total return last 3 years = 140.44%
  2. Total return last 5 years = 43.12%

Notes

It falls under the category of "excellent."

China Life Insurance Co Ltd (NYSE:LFC)

Industry: Life & Health

Levered Free Cash Flow : 477.04M

Growth

  1. Net income for the past three years
  2. Net Income 2009 = $3141 million
  3. Net Income 2009 = $4843 million
  4. Net Income 2010 = $5001 million
  1. EBITDA 12/2010 = $6331 million
  2. EBITDA 12/2009 = $6350 million
  3. Net income Reported Quarterly = $36 million
  1. Total cash flow from operating activities
  2. 2008 = $12.44 billion
  3. 2009 = $21.93 billion
  4. 2010 = $27.11 billion
  1. Cash Flow 12/2010 = 10.57 $/share
  2. Cash Flow 12/2009 = 10.25 $/share
  3. Anl EPS before NRI 12/2010 = 2.7
  4. Anl EPS before NRI 12/2009 = 2.57
  5. Anl EPS before NRI 12/2008 = 1.49
  6. Anl EPS before NRI 12/2007 = 2.85

Performance

  1. Quarterly Earnings Growth = -45.7%
  2. Quarterly Revenue Growth = -6.7%
  1. Price to Book = 0.73
  2. Price to Tangible Book = 2.85
  3. Price to Cash Flow = 3.86
  4. Price to Free Cash Flow = 3.7
  1. Current Ratio 5 Year Average = 4.28
  2. Quick Ratio = 6.42
  3. Cash Ratio = 5.69
  4. Total return last 3 years = 7.21%
  5. Total return last 5 years = 7.43%

Dividend sustainability and history

  1. Payout Ratio = 0.48
  2. Payout Ratio 5 Year Avg 09/2011 = 1.28
  3. Payout Ratio 5 Year Avg 06/2011 = 1.28
  1. Dividend growth rate 3 year avg = 3.91%
  2. Consecutive dividend increases = 0 years
  3. Paying dividends since = 2006

Notes

It falls under the category of "good."

Company : Amer Express Co (NYSE:AXP)

Free Cash Flow = $9.2 billion

Basic Key ratios

  1. Percentage Held by Insiders = 1.48
  2. Market Cap ($mil) = 62057
  3. Number of Institutional Sellers 12 Weeks = 3

Growth

  1. Net Income ($mil) 12/2011 = 4935
  2. Net Income ($mil) 12/2010 = 4057
  3. Net Income ($mil) 12/2009 = 2130
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 19.68
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 12.19
  1. EBITDA ($mil) 12/2011 = 10194
  2. EBITDA ($mil) 12/2010 = 9304
  3. EBITDA ($mil) 12/2009 = 6118
  4. Net Income Reported Quarterlytr ($mil) = 1178
  5. Annual Net Income this Yr/ Net Income last Yr = 21.64
  6. Cash Flow ($/sh) 12/2011 = 4.99
  7. Cash Flow ($/sh) 12/2010 = 4.15
  8. Cash Flow ($/sh) 12/2009 = 2.42
  1. Sales ($mil) 12/2011 = 28850
  2. Sales ($mil) 12/2010 = 27819
  3. Sales ($mil) 12/2009 = 24523
  1. Annual EPS before NRI 12/2007 = 3.43
  2. Annual EPS before NRI 12/2008 = 2.42
  3. Annual EPS before NRI 12/2009 = 1.54
  4. Annual EPS before NRI 12/2010 = 3.41
  5. Annual EPS before NRI 12/2011 = 4.12

Dividend history

  1. Dividend Yield = 1.3%
  2. Dividend Yield 5 Year Average 12/2011 = 2.3%
  3. Annual Dividend 12/2011 = 0.72
  4. Annual Dividend 12/2010 = 0.72
  5. Forward Yield = 1.35
  6. Dividend 5 year Growth 12/2011 = 5.00%

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.18
  2. Payout Ratio 5 Year Average 06/2011 = 0.28
  3. Change in Payout Ratio = -0.11

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 14.31
  2. Next 3-5 Year Estimate EPS Growth rate = 11.33
  3. EPS Growth Quarterly(1)/Q(-3) = -110.64
  4. ROE 5 Year Average 06/2011 = 26.52
  5. Return on Investment 06/2011 = 6.12
  6. Debt/Total Cap 5 Year Average 06/2011 = 80.66
  1. Current Ratio 06/2011 = 1.21
  2. Current Ratio 5 Year Average = 1.71
  3. Quick Ratio = 1.21
  4. Cash Ratio = 0.44
  5. Interest Coverage Quarterly = 4.04

Valuation

  1. Book Value Quarterly = 16.18
  2. Price/ Book = 3.29
  3. Price/ Cash Flow = 10.67
  4. Price/ Sales = 2.11
  5. EV/EBITDA 12 Mo = 11.51

Notes

It falls under the category of "good."

Exelon Corp. (NYSE:EXC)

Industry: Electric Utilities

Levered Free Cash Flow: 1.38B

Growth

  1. Net income for the past three years
  2. Net Income 2009 = $2707 million
  3. Net Income 2010 = $2563 million
  4. Net Income 2011 = $2495 million
  1. EBITDA 12/2011 = $6982 million
  2. EBITDA 12/2010 = $7981 million
  3. EBITDA 12/2009 = $7751 million
  4. Net income Reported Quarterly = $288 million
  1. Total cash flow from operating activities
  2. 2009 = $6.1 billion
  3. 2010 = $5.25 billion
  4. 2011 = $4.86 billion
  1. Cash Flow 12/2011 = 7.64 $/share
  2. Cash Flow 12/2010 = 8.42 $/share
  3. Cash Flow 12/2009 = 8.07 $/share
  1. Annual EPS before NRI 12/2011 = 4.16
  2. Annual EPS before NRI 12/2010 = 3.95
  3. Annual EPS before NRI 12/2009 = 4.12

Performance

  1. ROE = 19.45%
  2. Return on Assets = 5.2%
  3. Quarterly Earnings Growth = 15.6%
  4. Quarterly Revenue Growth = -11.2%
  1. Key Ratios
  2. Price to Sales = 1.37
  3. Price to Book = 1.83
  4. Price to Tangible Book = 2.23
  5. Price to Cash Flow = 5.18
  6. Price to Free Cash Flow = -27.1
  1. Current Ratio 09/2011 = 1.1
  2. Current Ratio 5 Year Average = 1.18
  3. Quick Ratio = 0.93
  4. Cash Ratio = 0.4
  5. Interest Coverage 09/2011 = 6.69
  6. Total return last 3 years = 10.48%
  7. Total return last 5 years = -22.56%

Dividend sustainability and history

  1. Payout Ratio 09/2011 = 0.51
  2. Payout Ratio 06/2011 = 0.49
  3. Payout Ratio 5 Year Average 09/2011 = 0.49
  4. Payout Ratio 5 Year Average 06/2011 = 0.49
  5. Change in Payout Ratio = 0.01
  1. Dividend yield 5 year average = 4.5%
  2. Dividend growth rate 3 year avg = 3.13%
  3. Dividend growth rate 5 year avg = 6.6%
  4. Paying dividends since = 1902

Notes

In terms of dividends we would rate, this as a good play, but in terms of growth, we would rate it between average and good.

Sources: 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.

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: Analysis Of 5 Growth Plays Rated Good Or Excellent