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"With high hope for the future, no prediction is ventured."

Abraham Lincoln

While the extremely low rate environment and the ongoing economic uncertainty is driving more individuals to seek investments that pay 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.

Long-term debt-to-equity ratio - This is the total long term debt divided by the total equity. The amount of long-term debt a company carries on its balance 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 as this cannot last forever. If your tolerance for risk is 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 5 Covered Call Plays: 2 Great, 2 Good And 1 To Take or leave.

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

Talisman Energy (NYSE:TLM) is our play of choice but at this stage of the game only investors willing to take on bit of extra risk and with long term perspectives should consider this stock. We like Talisman for the following reasons:

  • It has a decent quarterly revenue growth of 13.8%.
  • Net income has increased from $385 million in 2009 to $776 million in 2011.
  • EBITDA increased from $-329 million to a massive $4.56 billion in 2011.
  • Cash flow per share skyrocketed from 17 cents per share in 2009 to $2.94 in 2011.
  • Sales increased from $7.02 billion in 2009 to $8.27 billion in 2011.
  • It sports a good five year dividend growth rate of 14.7%.
  • While the current and quick ratio is weak, the strong interest ratio of 18.66 somewhat compensates for this shortfall.
  • It has 3-5 year Projected EPS growth rate of 8.5%.
  • It sports a decent long-term debt to equity ratio of 0.46.
  • It has a strong operating cash flow of $2.81 billion.
  • It has consecutively increased dividends for nine years.
  • It sports a fairly high beta of 1.74, which makes it a good candidate for covered writes. Selling covered calls can open up a second stream of income.
  • Talisman found light crude oil in the Kurdamir-2 well in Iraq. It is the operator of the Kurdamir block with a 40% working interest.

"We have tested only a portion of an upper zone, but we have clear indications that there is oil here," said Richard Herbert, executive vice-president of international exploration. Herbert said the company will now drill deep and conduct more extensive testing at the Kurdamir-2 well over the summer.

  • $100K invested for 10 years would have grown to $340K, and that is without the dividends being reinvested. If the dividends were reinvested the rate of return would have been much higher.
  • The stock has taken a beating, and the worst news could already be priced in.

Technical Outlook

A weekly close above 16 on strong volume will turn the outlook bullish and should lead to a test of the 20 plus ranges. As long as it does not close below $10.75 on a weekly basis the outlook will remain neutral.

Company: Talisman Energy

Levered Free Cash Flow = -1.41B

Basic Key ratios

  1. Percentage Held by Insiders = 6.29
  2. Market Cap ($mil) = 13242

Growth

  1. Net Income ($mil) 12/2011 = 776
  2. Net Income ($mil) 12/2010 = 629
  3. Net Income ($mil) 12/2009 = 385
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 23.11
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 60.36
  1. EBITDA ($mil) 12/2011 = 4569
  2. EBITDA ($mil) 12/2010 = 3521
  3. EBITDA ($mil) 12/2009 = -329
  4. Net Income Reported Quarterlytr ($mil) = -117
  5. Annual Net Income this Yr/ Net Income last Yr = 23.33
  6. Cash Flow ($/share) 12/2011 = 2.94
  7. Cash Flow ($/share) 12/2010 = 2.19
  8. Cash Flow ($/share) 12/2009 = 0.17
  1. Sales ($mil) 12/2011 = 8272
  2. Sales ($mil) 12/2010 = 6712
  3. Sales ($mil) 12/2009 = 7028
  1. Annual EPS before NRI 12/2007 = 0.93
  2. Annual EPS before NRI 12/2008 = 1.91
  3. Annual EPS before NRI 12/2009 = 0.17
  4. Annual EPS before NRI 12/2010 = 0.13
  5. Annual EPS before NRI 12/2011 = 0.51

Dividend history

  1. Dividend Yield = 2.1
  2. Dividend Yield 5 Year Average =1.4%
  3. Annual Dividend 12/2011 = 0.41
  4. Annual Dividend 12/2010 = 0.24
  5. Forward Yield = 2.1
  6. Dividend 5 year Growth 12/2011 = 14.7%

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.93
  2. Payout Ratio 5 Year Average 06/2011 = 0.4
  3. Change in Payout Ratio = 0.53

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -49.21
  2. Next 3-5 Year Estimate EPS Growth rate = 8.5
  3. EPS Growth Quarterly(1)/Q(-3) = 1-133.33
  4. ROE 5 Year Average 06/2011 = 11.46
  5. Return on Investment 06/2011 = 5.48
  6. Debt/Total Cap 5 Year Average 06/2011 = 29.37
  1. Current Ratio 06/2011 = 0.65
  2. Current Ratio 5 Year Average = 0.95
  3. Quick Ratio = 0.6
  4. Cash Ratio = 0.16
  5. Interest Coverage Quarterly = 18.66

Valuation

  1. Book Value Quarterly = 9.53
  2. Price/ Book = 1.35
  3. Price/ Cash Flow = 4.37
  4. Price/ Sales = 1.6
  5. EV/EBITDA 12 Mo = 3.82

Company : Prudential Financial, Inc. (NYSE:PRU)

Levered Free Cash Flow = 5.27B

Basic Key ratios

  1. Percentage Held by Insiders = 0.12
  2. Market Cap ($mil) = 29540
  3. Number of Institutional Sellers 12 Weeks = 1

Growth

  1. Net Income ($mil) 12/2011 = 3666
  2. Net Income ($mil) 12/2010 = 3195
  3. Net Income ($mil) 12/2009 = 3124
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 30.1
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 184.51
  1. EBITDA ($mil) 12/2011 = 5407
  2. EBITDA ($mil) 12/2010 = 4288
  3. EBITDA ($mil) 12/2009 = 1699
  4. Net Income Reported Quarterlytr ($mil) = 606
  5. Annual Net Income this Yr/ Net Income last Yr = 14.74
  6. Cash Flow ($/share) 12/2011 = 7.29
  7. Cash Flow ($/share) 12/2010 = 5.91
  8. Cash Flow ($/share) 12/2009 = 5.79
  1. Sales ($mil) 12/2011 = 39397
  2. Sales ($mil) 12/2010 = 30982
  3. Sales ($mil) 12/2009 = 27740
  1. Annual EPS before NRI 12/2007 = 7.54
  2. Annual EPS before NRI 12/2008 = 2.69
  3. Annual EPS before NRI 12/2009 = 5.58
  4. Annual EPS before NRI 12/2010 = 6.27
  5. Annual EPS before NRI 12/2011 = 6.41

Dividend history

  1. Dividend Yield = 2.31
  2. Dividend Yield 5 Year Average =1.90%
  3. Annual Dividend 12/2011 = 1.45
  4. Annual Dividend 12/2010 = 1.15
  5. Forward Yield = 2.31
  6. Dividend 5 year Growth =6.8%

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.23
  2. Payout Ratio 5 Year Average 06/2011 = 0.17
  3. Change in Payout Ratio = 0.06

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -2.97
  2. Next 3-5 Year Estimate EPS Growth rate = 9
  3. EPS Growth Quarterly(1)/Q(-3) = -110.67
  4. ROE 5 Year Average 06/2011 = 13.09
  5. Return on Investment 06/2011 = 5.23
  6. Debt/Total Cap 5 Year Average 06/2011 = 43.23
  1. Current Ratio 06/2011 = 0.17
  2. Current Ratio 5 Year Average = 0.24
  3. Quick Ratio = 0.17
  4. Cash Ratio = 0.16
  5. Interest Coverage Quarterly = 1.05

Valuation

  1. Book Value Quarterly = 80.45
  2. Price/ Book = 0.78
  3. Price/ Cash Flow = 8.63
  4. Price/ Sales = 0.75
  5. EV/EBITDA 12 Mo = 1.07

Notes

It would fall under the category of "good"

Company : Hartford Financial Services (NYSE:HIG)

Levered Free Cash Flow = 7.16B

Basic Key ratios

  1. Percentage Held by Insiders = 0.13
  2. Market Cap ($mil) = 9377

Growth

  1. Net Income ($mil) 12/2011 = 662
  2. Net Income ($mil) 12/2010 = 1680
  3. Net Income ($mil) 12/2009 = -887
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = -60.6
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = -79.48
  1. EBITDA ($mil) 12/2011 = 2255
  2. EBITDA ($mil) 12/2010 = 3509
  3. EBITDA ($mil) 12/2009 = 671
  4. Net Income Reported Quarterlytr ($mil) = 127
  5. Annual Net Income this Yr/ Net Income last Yr = -60.6
  6. Cash Flow ($/share) 12/2011 = 5.58
  7. Cash Flow ($/share) 12/2010 = 6.49
  8. Cash Flow ($/share) 12/2009 = 7.08
  1. Sales ($mil) 12/2011 = 21859
  2. Sales ($mil) 12/2010 = 22049
  3. Sales ($mil) 12/2009 = 24701
  1. Annual EPS before NRI 12/2007 = 10.33
  2. Annual EPS before NRI 12/2008 = 2.74
  3. Annual EPS before NRI 12/2009 = 1.85
  4. Annual EPS before NRI 12/2010 = 3.32
  5. Annual EPS before NRI 12/2011 = 1.94

Dividend history

  1. Dividend Yield = 1.88=2.9%
  2. Annual Dividend 12/2011 = 0.4
  3. Annual Dividend 12/2010 = 0.2
  4. Forward Yield = 1.88
  5. Dividend 5 year growth =-29%

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.21
  2. Payout Ratio 5 Year Average 06/2011 = 0.18
  3. Change in Payout Ratio = 0.03

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -24.76
  2. Next 3-5 Year Estimate EPS Growth rate = 7
  3. EPS Growth Quarterly(1)/Q(-3) = 134.91
  4. ROE 5 Year Average 06/2011 = 9.33
  5. Return on Investment 06/2011 = 3.39
  6. Debt/Total Cap 5 Year Average 06/2011 = 26.1
  1. Current Ratio 06/2011 = 0.4
  2. Current Ratio 5 Year Average = 1.65
  3. Quick Ratio = 0.4
  4. Cash Ratio = 0.33
  5. Interest Coverage Quarterly = 1.72

Valuation

  1. Book Value Quarterly = 50.15
  2. Price/ Book = 0.43
  3. Price/ Cash Flow = 3.82
  4. Price/ Sales = 0.43
  5. EV/EBITDA 12 Mo = -10.8

Notes

It would fall under the category of "average". Net income, cash flow per share, EBITDA and Sales have all pulled back from 2010 levels.

Company : American Water Work (NYSE:AWK)

Levered Free Cash Flow = -102.31M

Basic Key ratios

  1. Percentage Held by Insiders = 0.06
  2. Market Cap ($mil) = 5885

Growth

  1. Net Income ($mil) 12/2011 = 310
  2. Net Income ($mil) 12/2010 = 268
  3. Net Income ($mil) 12/2009 = -233
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 24.77
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 61.5
  1. EBITDA ($mil) 12/2011 = 1166
  2. EBITDA ($mil) 12/2010 = 1072
  3. EBITDA ($mil) 12/2009 = 499
  4. Net Income Reported Quarterlytr ($mil) = 65
  5. Annual Net Income this Yr/ Net Income last Yr = 15.6
  6. Cash Flow ($/share) 12/2011 = 3.75
  7. Cash Flow ($/share) 12/2010 = 3.41
  8. Cash Flow ($/share) 12/2009 = 2.97
  1. Sales ($mil) 12/2011 = 2666
  2. Sales ($mil) 12/2010 = 2711
  3. Sales ($mil) 12/2009 = 2441
  1. Annual EPS before NRI 12/2008 = 1.1
  2. Annual EPS before NRI 12/2009 = 1.25
  3. Annual EPS before NRI 12/2010 = 1.53
  4. Annual EPS before NRI 12/2011 = 1.75

Dividend history

  1. Dividend Yield = 2.75
  2. Annual Dividend 12/2011 = 0.9
  3. Annual Dividend 12/2010 = 0.86
  4. Forward Yield = 2.75
  5. Dividend 3 year Growth =15.92%

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.53
  2. Payout Ratio 5 Year Average 06/2011 = 0.61
  3. Change in Payout Ratio = -0.09

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 13.73
  2. Next 3-5 Year Estimate EPS Growth rate = 8.12
  3. EPS Growth Quarterly(1)/Q(-3) = -147.83
  4. ROE 5 Year Average 06/2011 = 5.96
  5. Return on Investment 06/2011 = 3.22
  6. Debt/Total Cap 5 Year Average 06/2011 = 55.76
  7. Current Ratio 06/2011 = 0.94
  8. Current Ratio 5 Year Average = 0.79
  9. Quick Ratio = 0.92
  10. Cash Ratio = 0.78
  11. Interest Coverage Quarterly = 2.28

Valuation

  1. Book Value Quarterly = 24.13
  2. Price/ Book = 1.39
  3. Price/ Cash Flow = 8.92
  4. Price/ Sales = 2.19
  5. EV/EBITDA 12 Mo = 9.6

Notes

It would fall under the category of "good."

Company: Veolia Environment (NYSE:VE)

Levered Free Cash Flow = -1.00B

Basic Key ratios

Percentage Held by Insiders = 1

Market Cap ($mil) = 8203

Growth

  1. Net Income ($mil) 12/2011 = -441
  2. Net Income ($mil) 12/2010 = 1157
  3. Net Income ($mil) 12/2009 = 1174
  1. EBITDA ($mil) 12/2011 = 4263
  2. EBITDA ($mil) 12/2010 = 4163
  3. EBITDA ($mil) 12/2009 = 4690
  4. Annual Net Income this Yr/ Net Income last Yr = -138.1
  5. Cash Flow ($/share) 12/2011 = 7.01
  6. Cash Flow ($/share) 12/2010 = 6.75
  7. Cash Flow ($/share) 12/2009 = 8.09
  1. Sales ($mil) 12/2011 = 39855
  2. Sales ($mil) 12/2010 = 48306
  3. Sales ($mil) 12/2009 = 48199
  1. Annual EPS before NRI 12/2007 = 4.03
  2. Annual EPS before NRI 12/2008 = 2.17
  3. Annual EPS before NRI 12/2009 = 1.86
  4. Annual EPS before NRI 12/2010 = 1.72
  5. Annual EPS before NRI 12/2011 = -1.32

Dividend history

  1. Dividend Yield = 9.07
  2. Dividend Yield 5 Year Average =6.3%
  3. Annual Dividend 12/2011 = 1.47
  4. Annual Dividend 12/2010 = 1.23
  5. Forward Yield = 9.07
  6. Dividend 5 year Growth =9.47%

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -51.47
  2. Debt/Total Cap 5 Year Average 06/2011 = 64.04
  3. Current Ratio 06/2011 = 1.12
  4. Current Ratio 5 Year Average = 1.08
  5. Quick Ratio = 1.06
  6. Cash Ratio = 0.48

Valuation

  1. Book Value Quarterly = 27.1
  2. Price/ Book = 0.6
  3. Price/ Cash Flow = 2.31
  4. EV/EBITDA 12 Mo = 5.51

Notes

It would fall in the average to below average category.

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. Earnings 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.

Source: 5 Interesting Stocks: 3 To Buy And 2 To Take Or Leave Behind