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When accused of being an unrealistic optimist, say the sun never stops shining.

Vanna Bonta

REITs continue to payout rather lofty dividends and if one invests in the right REITs one could potentially achieve one's desired goals a lot faster than originally projected. Investing in companies that offer good yields makes sense for the following reasons:

  • A steady income without having to sell your position
  • Provides one with more financial flexibility.
  • It's a good hedge against inflation
  • Cash Flow regardless of market direction.
  • Quicker compounding.
  • Provides one with the two potential sources of income; one from capital gains and the other from the dividends paid out
  • Additional streams of income by selling covered calls.

When it comes to investing in REITs, investors should be aware of the following:

Payout ratios are not that important when it comes to REITs as they are required by law to pay a majority of their cash flow as dividends. Payout ratios are calculated by dividing the dividend rate by the net income per share, and this is why the payout ratio for REITs is often higher than 100%. The more important ratio to focus on is the cash flow per share. If one focuses on the cash flow, one will see that in most cases, it exceeds the dividend declared per share.

Prospect Capital Corporation (NASDAQ:PSEC) is our favorite play for the following reasons:

  • It boasts a strong five-year dividend average of 12%
  • It has a strong five-year sales growth of 41%
  • Net income has increased from $35 million in 2009 to $118 million in 2011.
  • EBITDA has is up almost 200% from its 2009 levels of $40 million. In 2011 EBITDA came in at $118 million.
  • Sales have increased by $69 million from $100 million in 2009 to $169 million in 2011.
  • Annual EPS before NRI increased from $1.06 in 2007, to $1.10 in 2011.
  • Though the current and quick ratios are weak, the interest coverage ratio of 7.61 somewhat makes up for this shortfall.
  • It has a very strong quarterly earnings and revenue growth rate both of which are in excess of 100%
  • It has a decent three-year total return of 59%
  • It sports a levered free cash flow of $112 million.
  • $100K invested for eight years would have grown to $120K; if dividends were reinvested the rate of return would be far higher.

(Click charts to enlarge)

Company: Prospect Capital Corporation

Levered Free Cash Flow = 112.57M

Basic Key ratios

  1. Percentage Held by Insiders = 2.3
  2. Market Cap ($mil) = 1305

Growth

  1. Net Income ($mil) 12/2011 = 118
  2. Net Income ($mil) 12/2010 = 20
  3. Net Income ($mil) 12/2009 = 35
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 77.28
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 101.92
  1. EBITDA ($mil) 12/2011 = 118
  2. EBITDA ($mil) 12/2010 = 13
  3. EBITDA ($mil) 12/2009 = 40
  4. Net Income Reported Quarterly ($mil) = 64
  5. Annual Net Income this Yr/ Net Income last Yr = 502.6
  6. Cash Flow ($/share) 12/2011 = 0.71
  7. Cash Flow ($/share) 12/2010 = 0.77
  8. Cash Flow ($/share) 12/2009 = 1.37
  1. Sales ($mil) 12/2011 = 169
  2. Sales ($mil) 12/2010 = 114
  3. Sales ($mil) 12/2009 = 100
  1. Annual EPS before NRI 12/2007 = 1.06
  2. Annual EPS before NRI 12/2008 = 1.91
  3. Annual EPS before NRI 12/2009 = 1.87
  4. Annual EPS before NRI 12/2010 = 1.12
  5. Annual EPS before NRI 12/2011 = 1.1

Dividend history

  1. Dividend Yield = 11.37
  2. Dividend Yield 5 Year Average =12%
  3. Annual Dividend 12/2011 = 1.21
  4. Annual Dividend 12/2010 = 2.14
  5. Forward Yield = 11.37
  6. Dividend 5 year Growth =0.83%

Dividend sustainability

  1. Payout Ratio 06/2011 = 1.04
  2. Payout Ratio 5 Year Average 06/2011 = 1.05
  3. Change in Payout Ratio = -0.01

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -17.11
  2. EPS Growth Quarterly(1)/Q(-3) = 113.16
  3. ROE 5 Year Average 06/2011 = 10.67
  4. Return on Investment 06/2011 = 8.42
  5. Debt/Total Cap 5 Year Average 06/2011 = 5.32
  1. Current Ratio 06/2011 = 0.08
  2. Current Ratio 5 Year Average = 1.11
  3. Quick Ratio = 0.1
  4. Cash Ratio = 0.02
  5. Interest Coverage Quarterly = 7.61

Valuation

  1. Book Value Quarterly = 10.71
  2. Price/ Book = 1
  3. Price/ Cash Flow = 15.04
  4. Price/ Sales = 5.84
  5. EV/EBITDA 12 Mo = 13.76

Company : Armour Res Reit (NYSE:ARR)

Free Cash Flow =$118 million.

Basic Key ratios

Percentage Held by Insiders = 8.9

Market Cap ($mil) = 944

Growth

  1. Net Income ($mil) 12/2011 = -9
  2. Net Income ($mil) 12/2010 = 7
  3. Net Income ($mil) 12/2009 = -2
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = -244.49
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 220.84
  1. EBITDA ($mil) 12/2011 = 25
  2. EBITDA ($mil) 12/2010 = 10
  3. EBITDA ($mil) 12/2009 = -2
  4. Net Income Reported Quarterlytr ($mil) = 24
  5. Annual Net Income this Yr/ Net Income last Yr = -244.56
  6. Cash Flow ($/share) 12/2011 = 0.27
  7. Cash Flow ($/share) 12/2010 = 0.85
  8. Cash Flow ($/share) 12/2009 = -0.49
  1. Sales ($mil) 12/2011 = 0
  2. Sales ($mil) 12/2010 = 8
  3. Sales ($mil) 12/2009 = 0
  4. Annual EPS before NRI 12/2010 = 1.12

Dividend history

  1. Dividend Yield = 19.82
  2. Annual Dividend 12/2011 = 1.41
  3. Annual Dividend 12/2010 = 1.52
  4. Forward Yield = 18.02

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -16.39
  2. EPS Growth Quarterly(1)/Q(-3) = -162.97
  3. ROE 5 Year Average 06/2011 = 0.87
  4. Return on Investment 06/2011 = -1.32
  5. Debt/Total Cap 5 Year Average 06/2011 = 17.63
  1. Current Ratio 06/2011 = 1.16
  2. Current Ratio 5 Year Average = 0.79
  3. Quick Ratio = 1.16
  4. Cash Ratio = 1.09
  5. Interest Coverage =0.2

Valuation

  1. Book Value Quarterly = 6.76
  2. Price/ Book = 0.99
  3. Price/ Cash Flow = 24.36
  4. Price/ Sales = 8.59
  5. EV/EBITDA 12 Mo = -186.21

Notes

It would fall under the category of "good". $100 invested for 3 years would have grown to $130K.

Company : PennyMac Mortgage Investment (NYSE:PMT)

Free Cash Flow = -$275 million

Basic Key ratios

Percentage Held by Insiders = 1.17

Market Cap ($mil) = 549

Growth

  1. Net Income ($mil) 12/2011 = 64
  2. Net Income ($mil) 12/2010 = 24
  3. Net Income ($mil) 12/2009 = -2
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 163.2
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 167.37
  1. EBITDA ($mil) 12/2011 = 91
  2. EBITDA ($mil) 12/2010 = 28
  3. EBITDA ($mil) 12/2009 = -2
  4. Net Income Reported Quarterlytr ($mil) = 20
  5. Annual Net Income this Yr/ Net Income last Yr = 163.19
  6. Cash Flow ($/share) 12/2011 = 2.38
  7. Cash Flow ($/share) 12/2010 = 1.46
  8. Cash Flow ($/share) 12/2009 = -0.11
  1. Sales ($mil) 12/2011 = 129
  2. Sales ($mil) 12/2010 = 44
  3. Sales ($mil) 12/2009 = 2
  1. Annual EPS before NRI 12/2010 = 1.44
  2. Annual EPS before NRI 12/2011 = 2.41

Dividend history

  1. Dividend Yield = 12.05
  2. Annual Dividend 12/2011 = 1.84
  3. Annual Dividend 12/2010 = 0.77
  4. Forward Yield = 12.05

Dividend sustainability

Payout Ratio 06/2011 = 0.84

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -7.54
  2. Next 3-5 Year Estimate EPS Growth rate = 14.5
  3. EPS Growth Quarterly(1)/Q(-3) = -162.79
  4. Return on Investment 06/2011 = 8.71
  5. Debt/Total Cap 5 Year Average 06/2011 = 18.61
  1. Current Ratio 06/2011 = 5.37
  2. Current Ratio 5 Year Average = 13.22
  3. Quick Ratio = 5.37
  4. Cash Ratio = 0.22
  5. Interest Coverage Quarterly = 4.29

Valuation

  1. Book Value Quarterly = 19.59
  2. Price/ Book = 0.93
  3. Price/ Cash Flow = 7.68
  4. Price/ Sales = 4.56
  5. EV/EBITDA 12 Mo = 12.14

Notes

It would fall under the category of "average-good". $100k invested for 3 years would have grown only to $102K

Company : Starwood Properties (NYSE:STWD)

Free Cash Flow $79 million.

Basic Key ratios

  1. Percentage Held by Insiders = 2.6
  2. Market Cap ($mil) = 2003

Growth

  1. Net Income ($mil) 12/2011 = 119
  2. Net Income ($mil) 12/2010 = 57
  3. Net Income ($mil) 12/2009 = -3
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 108.59
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 133.47
  1. EBITDA ($mil) 12/2011 = 79
  2. EBITDA ($mil) 12/2010 = 46
  3. EBITDA ($mil) 12/2009 = -3
  4. Net Income Reported Quarterlytr ($mil) = 41
  5. Annual Net Income this Yr/ Net Income last Yr = 109.27
  6. Cash Flow ($/share) 12/2011 = 0.97
  7. Cash Flow ($/share) 12/2010 = 0.92
  8. Cash Flow ($/share) 12/2009 = -0.07
  1. Sales ($mil) 12/2011 = 205
  2. Sales ($mil) 12/2010 = 94
  3. Sales ($mil) 12/2009 = 7
  4. Annual EPS before NRI 12/2010 = 1.14
  5. Annual EPS before NRI 12/2011 = 1.53

Dividend history

  1. Dividend Yield = 8.19
  2. Annual Dividend 12/2011 = 1.74
  3. Annual Dividend 12/2010 = 1.2
  4. Forward Yield = 8.19

Dividend sustainability

Payout Ratio 06/2011 = 1.09

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -11.45
  2. Next 3-5 Year Estimate EPS Growth rate = 7.5
  3. EPS Growth Quarterly(1)/Q(-3) = -121.21
  4. Return on Investment 06/2011 = 5.49
  5. Debt/Total Cap 5 Year Average 06/2011 = 29.27
  1. Current Ratio 06/2011 = 25.58
  2. Current Ratio 5 Year Average = 233.63
  3. Quick Ratio = 25.58
  4. Cash Ratio = 22.58
  5. Interest Coverage =5.20

Valuation

  1. Book Value Quarterly = 18.98
  2. Price/ Book = 1.13
  3. Price/ Cash Flow = 22.22
  4. Price/ Sales = 10.12
  5. EV/EBITDA 12 Mo = 38.43

Notes

Net income, cash flow per share, EBITDA, and sales have been rising for the past 3 years. It has a decent 3-5 year EPS growth estimate of 7.5%. It would fall under the category of "good"

Company : Resource Capital (NYSE:RSO)

Free Cash Flow = $33 million

Basic Key ratios

  1. Percentage Held by Insiders = 4.71
  2. Market Cap ($mil) = 477

Growth

  1. Net Income ($mil) 12/2011 = 38
  2. Net Income ($mil) 12/2010 = 19
  3. Net Income ($mil) 12/2009 = 6
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 93.95
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 104.41
  1. EBITDA ($mil) 12/2011 = 30
  2. EBITDA ($mil) 12/2010 = 14
  3. EBITDA ($mil) 12/2009 = 6
  4. Net Income Reported Quarterlytr ($mil) = 0
  5. Annual Net Income this Yr/ Net Income last Yr = 93.98
  6. Cash Flow ($/share) 12/2011 = 0.41
  7. Cash Flow ($/share) 12/2010 = 0.88
  8. Cash Flow ($/share) 12/2009 = 0.84
  1. Sales ($mil) 12/2011 = 125
  2. Sales ($mil) 12/2010 = 104
  3. Sales ($mil) 12/2009 = 98
  1. Annual EPS before NRI 12/2007 = 1.72
  2. Annual EPS before NRI 12/2008 = -0.12
  3. Annual EPS before NRI 12/2009 = 1.22
  4. Annual EPS before NRI 12/2010 = 1.15
  5. Annual EPS before NRI 12/2011 = 0.56

Dividend history

  1. Dividend Yield = 17.45
  2. Dividend Yield 5 Year Average =22%
  1. Annual Dividend 12/2011 = 1
  2. Annual Dividend 12/2010 = 1
  3. Forward Yield = 13.96
  4. Dividend 5 year Growth =-5.87%

Dividend sustainability

  1. Payout Ratio 06/2011 = 1.56
  2. Payout Ratio 5 Year Average 06/2011 = 1.29
  3. Change in Payout Ratio = 0.27

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -24.54
  2. Next 3-5 Year Estimate EPS Growth rate = 5
  3. EPS Growth Quarterly(1)/Q(-3) = 193.94
  4. ROE 5 Year Average 06/2011 = 13.21
  5. Return on Investment 06/2011 = 2.15
  6. Debt/Total Cap 5 Year Average 06/2011 = 85.67
  1. Current Ratio 06/2011 = 89.45
  2. Current Ratio 5 Year Average = 173.9
  3. Quick Ratio = 89.45
  4. Cash Ratio = 8.4
  5. Interest Coverage Quarterly = 1.41

Valuation

  1. Book Value Quarterly = 5.54
  2. Price/ Book = 1.04
  3. Price/ Cash Flow = 13.91
  4. Price/ Sales = 4.61
  5. EV/EBITDA 12 Mo = 70.01

Notes

$100K invested for six years would have shrunk to $92K; as a result of this it would fall under the category of "average." Without the dividend payments the original $100K would shrunk even more; roughly it would have dropped down to $40K. Net income and sales have been rising for the past three years; traders willing to take on some risk could be well rewarded in the months ahead. Note that cash flow per share in 2011 was roughly 55% lower than it was in 2010 and in 2009.

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: Is It Time To Dump These Equities?