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In the learning to fish series, we provide investors with suggested guidelines for choosing a potential candidate and one candidate is selected as our play of choice. We provide reasons for this choice and in doing so hope to impart some understanding to those who are new to the field of dividend investing. A lot of ratios will be used throughout 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 to 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.
  • Cash flow per share - It should be trending upwards for the past three years.
  • Total cash flow from operating activities - It should be trending upwards for the past 3-4 years.
  • Current ratio - Should be above 1.
  • Interest coverage ratio - When available, any value above 1.5 is OK, but we would aim for 2.5-3.00 as our starting range. The higher the number the better.
  • 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).

The following criteria apply only to dividend paying stocks and not to growth stocks that might not pay out dividends:

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, one will see that in most cases, it exceeds the distribution/dividend declared per unit/share.

Dividend growth rate - It should be at 5% or higher. A high yield with a low dividend growth rate is not good in the long run, but neither is a low dividend yield with a high growth rate; one needs to find an equilibrium here. And there are exceptions to this rule, some stocks appreciate rather rapidly and so a low dividend could be offset by the capital gains.

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. One example is Jarden (NYSE:JAH).

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.

Reasons to consider Fifth Third Bank (NASDAQ:FITB):

  • A very strong free cash flow yield of 15.7%
  • A great free cash flow of $1.7 billion
  • A strong quarterly earnings growth rate of 62%
  • A good quarterly revenue growth rate of 25%
  • Net income increased from $737 million in 2009 to $1.2 billion in 2011
  • Cash flow per share increased from $0.36 in 2009 to $1.91 in 2011
  • Operating margins of 37%
  • Profit margins of 24%
  • EBITDA increased from $1.4 billion in 2009 to $2.59 billion in 2011
  • Annual EPS before NRI increased from $- 1.21 in 2009 to $ 1.18 in 2011
  • A great total three-year returns of 177%
  • A low payout ratio of 21%
  • A projected 3-5 year EPS growth rate of 8.71%
  • Year over year growth rate of 25.9% for 2012
  • A good interest coverage ratio of 8.18%

Company: Fifth Third Bank

Free cash flow $1.7 billion

Basic Key ratios

Percentage Held by Insiders = 0.65

Growth

  1. Net Income ($mil) 12/2011 = 1297
  2. Net Income ($mil) 12/2010 = 753
  3. Net Income ($mil) 12/2009 = 737
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 42.22
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 62.26
  1. EBITDA ($mil) 12/2011 = 2595
  2. EBITDA ($mil) 12/2010 = 1691
  3. EBITDA ($mil) 12/2009 = 1469
  4. Annual Net Income this Yr/ Net Income last Yr = 72.24
  5. Cash Flow ($/share) 12/2011 = 1.91
  6. Cash Flow ($/share) 12/2010 = 1.52
  7. Cash Flow ($/share) 12/2009 = -0.36
  1. Sales ($mil) 12/2011 = 6673
  2. Sales ($mil) 12/2010 = 7218
  3. Sales ($mil) 12/2009 = 9450
  1. Annual EPS before NRI 12/2007 = 2.02
  2. Annual EPS before NRI 12/2008 = -2.2
  3. Annual EPS before NRI 12/2009 = -1.21
  4. Annual EPS before NRI 12/2010 = 0.63
  5. Annual EPS before NRI 12/2011 = 1.18

Dividend history

  1. Dividend Yield = 2.30
  2. Dividend Yield 5 Year Average 12/2011 = 2.66
  3. Dividend Yield 5 Year Average 09/2011 = 2.66
  4. Annual Dividend 12/2011 = 0.28
  5. Annual Dividend 12/2010 = 0.04
  6. Forward Yield = 2.22
  7. Dividend 5 year Growth 12/2011 = -35.47

Dividend sustainability

  1. Payout Ratio 09/2011 = 0.21
  2. Payout Ratio 06/2011 = 0.27
  3. Payout Ratio 5 Year Average 12/2011 = 0.58
  4. Payout Ratio 5 Year Average 09/2011 = 0.58
  5. Payout Ratio 5 Year Average 06/2011 = 0.62
  6. Change in Payout Ratio = -0.37

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 5.21
  2. Next 3-5 Year Estimate EPS Growth rate = 8.71
  3. EPS Growth Quarterly(1)/Q(-3) = 3-150.00
  4. 5 Year History EPS Growth 12/2011 = -13.71
  5. 5 Year History EPS Growth 09/2011 = -13.71
  6. ROE 5 Year Average 12/2011 = 2.31
  7. Return on Investment 12/2011 = 6.37
  8. Debt/Total Cap 5 Year Average 12/2011 = 48.44
  1. Current Ratio 12/2011 = 0.95
  2. Current Ratio 09/2011 = 0.95
  3. Current Ratio 06/2011 = 0.95
  4. Current Ratio 5 Year Average = 0.97
  5. Quick Ratio = 0.92
  6. Cash Ratio = 0.05
  7. Interest Coverage Quarterly = 8.18

Valuation

  1. Book Value Quarterly = 14.36
  2. Price/ Book = 1
  3. Price/ Cash Flow = 7.56

Company: Assoc Banc Corp (ASBC)

Basic Key ratios

  1. Percentage Held by Insiders = 1.1
  2. Number of Institutional Sellers 12 Weeks = 1

Growth

  1. Net Income ($mil) 12/2011 = 140
  2. Net Income ($mil) 12/2010 = -1
  3. Net Income ($mil) 12/2009 = -132
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 229.6
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 86.55
  1. EBITDA ($mil) 12/2011 = 376
  2. EBITDA ($mil) 12/2010 = 146
  3. EBITDA ($mil) 12/2009 = -78
  4. Annual Net Income this Yr/ Net Income last Yr = 16534.12
  5. Cash Flow ($/share) 12/2011 = 1.54
  6. Cash Flow ($/share) 12/2010 = 0.69
  7. Cash Flow ($/share) 12/2009 = -0.15
  1. Sales ($mil) 12/2011 = 1024
  2. Sales ($mil) 12/2010 = 1152
  3. Sales ($mil) 12/2009 = 1332
  1. Annual EPS before NRI 12/2007 = 2.26
  2. Annual EPS before NRI 12/2008 = 1.36
  3. Annual EPS before NRI 12/2009 = -1.26
  4. Annual EPS before NRI 12/2010 = -0.18
  5. Annual EPS before NRI 12/2011 = 0.66

Dividend history

  1. Dividend Yield = 1.5
  2. Dividend Yield 5 Year Average 12/2011 = 2.76
  3. Dividend Yield 5 Year Average 09/2011 = 2.76
  4. Annual Dividend 12/2011 = 0.04
  5. Annual Dividend 12/2010 = 0.04
  6. Forward Yield = 1.51
  7. Dividend 5 year Growth 12/2011 = -60.03

Dividend sustainability

  1. Payout Ratio 09/2011 = 0.24
  2. Payout Ratio 06/2011 = 0.06
  3. Payout Ratio 5 Year Average 12/2011 = 0.5
  4. Change in Payout Ratio = -0.26

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -11.55
  2. Next 3-5 Year Estimate EPS Growth rate = 5.5
  3. EPS Growth Quarterly(1)/Q(-3) = 1-166.67
  4. 5 Year History EPS Growth 12/2011 = -34.27
  5. 5 Year History EPS Growth 09/2011 = -34.27
  6. ROE 5 Year Average 12/2011 = 4.18
  7. ROE 5 Year Average 09/2011 = 4.18
  8. ROE 5 Year Average 06/2011 = 4.58
  9. Return on Investment 12/2011 = 3.77
  10. Return on Investment 09/2011 = 3.77
  11. Return on Investment 06/2011 = 3.19
  12. Debt/Total Cap 5 Year Average 12/2011 = 35.23
  13. Debt/Total Cap 5 Year Average 09/2011 = 35.23
  14. Debt/Total Cap 5 Year Average 06/2011 = 35.98
  1. Current Ratio 12/2011 = 0.83
  2. Current Ratio 09/2011 = 0.83
  3. Current Ratio 06/2011 = 0.81
  4. Current Ratio 5 Year Average = 0.84
  5. Quick Ratio = 0.8
  6. Cash Ratio = 0.03
  7. Interest Coverage Quarterly = 5.57

Valuation

  1. Book Value Quarterly = 16.24
  2. Price/ Book = 0.82
  3. Price/ Cash Flow = 8.6

Company: Regions Financial Cp (NYSE:RF)

Basic Key ratios

Percentage Held by Insiders = 0.71

Growth

  1. Net Income ($mil) 12/2011 = -429
  2. Net Income ($mil) 12/2010 = -763
  3. Net Income ($mil) 12/2009 = -1261
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 68.98
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 188.41
  1. EBITDA ($mil) 12/2011 = 1959
  2. EBITDA ($mil) 12/2010 = 381
  3. EBITDA ($mil) 12/2009 = -34
  4. Annual Net Income this Yr/ Net Income last Yr = 43.78
  5. Cash Flow ($/share) 12/2011 = 1.47
  6. Cash Flow ($/share) 12/2010 = 0.31
  7. Cash Flow ($/share) 12/2009 = -0.42
  1. Sales ($mil) 12/2011 = 6395
  2. Sales ($mil) 12/2010 = 8220
  3. Sales ($mil) 12/2009 = 9087
  1. Annual EPS before NRI 12/2007 = 1.96
  2. Annual EPS before NRI 12/2008 = 0.74
  3. Annual EPS before NRI 12/2009 = -1.27
  4. Annual EPS before NRI 12/2010 = -0.46
  5. Annual EPS before NRI 12/2011 = 0.17

Dividend history

  1. Dividend Yield = 0.60
  2. Dividend Yield 5 Year Average 12/2011 = 3.64
  3. Dividend Yield 5 Year Average 09/2011 = 3.64
  4. Annual Dividend 12/2011 = 0.04
  5. Annual Dividend 12/2010 = 0.04
  6. Forward Yield = 0.59
  7. Dividend 5 year Growth 12/2011 = -61.71

Dividend sustainability

  1. Payout Ratio 09/2011 = 0.11
  2. Payout Ratio 06/2011 = 0.18
  3. Payout Ratio 5 Year Average 12/2011 = 0.58
  4. Payout Ratio 5 Year Average 09/2011 = 0.58
  5. Payout Ratio 5 Year Average 06/2011 = 0.62
  6. Change in Payout Ratio = -0.47

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -11.22
  2. Next 3-5 Year Estimate EPS Growth rate = 7
  3. EPS Growth Quarterly(1)/Q(-3) = 13-100.00
  4. 5 Year History EPS Growth 12/2011 = -42.27
  5. 5 Year History EPS Growth 09/2011 = -42.27
  6. ROE 5 Year Average 12/2011 = 1.07
  7. Return on Investment 12/2011 = 2.57
  8. Debt/Total Cap 5 Year Average 12/2011 = 42.27
  1. Current Ratio 12/2011 = 0.84
  2. Current Ratio 09/2011 = 0.84
  3. Current Ratio 06/2011 = 0.86
  4. Current Ratio 5 Year Average = 0.95
  5. Quick Ratio = 0.85
  6. Cash Ratio = 0.09
  7. Interest Coverage Quarterly = 4.92

Valuation

  1. Book Value Quarterly = 9.99
  2. Price/ Book = 0.68
  3. Price/ Cash Flow = 4.63

Company: Synovus Financial Cp (NYSE:SNV)

Basic Key ratios

  1. Percentage Held by Insiders = 1.7
  2. Number of Institutional Sellers 12 Weeks = 1

Growth

  1. Net Income ($mil) 12/2011 = -61
  2. Net Income ($mil) 12/2010 = -791
  3. Net Income ($mil) 12/2009 = -1432
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 108.34
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 145.45
  1. EBITDA ($mil) 12/2011 = 32
  2. EBITDA ($mil) 12/2010 = -757
  3. EBITDA ($mil) 12/2009 = -1511
  4. Annual Net Income this Yr/ Net Income last Yr = 92.33
  5. Cash Flow ($/share) 12/2011 = -0.02
  6. Cash Flow ($/share) 12/2010 = -1
  7. Cash Flow ($/share) 12/2009 = -2.92
  1. Sales ($mil) 12/2011 = 1481
  2. Sales ($mil) 12/2010 = 1630
  3. Sales ($mil) 12/2009 = 1925
  1. Annual EPS before NRI 12/2007 = 1.2
  2. Annual EPS before NRI 12/2008 = -0.42
  3. Annual EPS before NRI 12/2009 = -4.05
  4. Annual EPS before NRI 12/2010 = -1.3
  5. Annual EPS before NRI 12/2011 = -0.15

Dividend history

  1. Dividend Yield = 2.00
  2. Dividend Yield 5 Year Average 12/2011 = 2.82
  3. Dividend Yield 5 Year Average 09/2011 = 2.82
  4. Annual Dividend 12/2011 = 0.04
  5. Annual Dividend 12/2010 = 0.04
  6. Forward Yield = 1.87
  7. Dividend 5 year Growth 12/2011 = -52.95

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -17.76
  2. Next 3-5 Year Estimate EPS Growth rate = 8
  3. EPS Growth Quarterly(1)/Q(-3) = 1-122.22
  4. 5 Year History EPS Growth 12/2011 = N/A
  5. 5 Year History EPS Growth 09/2011 = N/A
  6. ROE 5 Year Average 12/2011 = -17.14
  7. ROE 5 Year Average 09/2011 = -17.14
  8. ROE 5 Year Average 06/2011 = -16.42
  9. Return on Investment 12/2011 = 1.32
  10. Return on Investment 09/2011 = 1.32
  11. Return on Investment 06/2011 = -0.74
  12. Debt/Total Cap 5 Year Average 12/2011 = 36.4
  13. Debt/Total Cap 5 Year Average 09/2011 = 36.4
  14. Debt/Total Cap 5 Year Average 06/2011 = 36.38
  1. Current Ratio 12/2011 = 0.97
  2. Current Ratio 09/2011 = 0.97
  3. Current Ratio 06/2011 = 0.97
  4. Current Ratio 5 Year Average = 0.99
  5. Quick Ratio = 0.96
  6. Cash Ratio = 0.1
  7. Interest Coverage Quarterly = 3.61

Valuation

  1. Book Value Quarterly = 2.36
  2. Price/ Book = 0.91
  3. Price/ Cash Flow = N/A

Company: Bancorpsouth (NYSE:BXS)

Basic Key ratios

Percentage Held by Insiders = 5.92

Growth

  1. Net Income ($mil) 12/2011 = 38
  2. Net Income ($mil) 12/2010 = 23
  3. Net Income ($mil) 12/2009 = 83
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 333.6
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 4728.75
  1. EBITDA ($mil) 12/2011 = 109
  2. EBITDA ($mil) 12/2010 = 72
  3. EBITDA ($mil) 12/2009 = 180
  4. Annual Net Income this Yr/ Net Income last Yr = 63.73
  5. Cash Flow ($/share) 12/2011 = 1.07
  6. Cash Flow ($/share) 12/2010 = 0.74
  7. Cash Flow ($/share) 12/2009 = 1.75
  1. Sales ($mil) 12/2011 = 809
  2. Sales ($mil) 12/2010 = 847
  3. Sales ($mil) 12/2009 = 891
  1. Annual EPS before NRI 12/2007 = 1.69
  2. Annual EPS before NRI 12/2008 = 1.45
  3. Annual EPS before NRI 12/2009 = 1.25
  4. Annual EPS before NRI 12/2010 = 0.27
  5. Annual EPS before NRI 12/2011 = 0.45

Dividend history

  1. Dividend Yield = 0.3
  2. Dividend Yield 5 Year Average 12/2011 = 3.55
  3. Dividend Yield 5 Year Average 09/2011 = 3.55
  4. Annual Dividend 12/2011 = 0.14
  5. Annual Dividend 12/2010 = 0.88
  6. Forward Yield = 0.3
  7. Dividend 5 year Growth 12/2011 = -45.61

Dividend sustainability

  1. Payout Ratio 09/2011 = 0.06
  2. Payout Ratio 06/2011 = 0.09
  3. Payout Ratio 5 Year Average 12/2011 = 0.92
  4. Payout Ratio 5 Year Average 09/2011 = 0.92
  5. Payout Ratio 5 Year Average 06/2011 = 0.94
  6. Change in Payout Ratio = -0.87

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -5.26
  2. Next 3-5 Year Estimate EPS Growth rate = 6
  3. EPS Growth Quarterly(1)/Q(-3) = 26-100.00
  4. 5 Year History EPS Growth 12/2011 = -33.26
  5. 5 Year History EPS Growth 09/2011 = -33.26
  6. ROE 5 Year Average 12/2011 = 7.18
  7. ROE 5 Year Average 09/2011 = 7.18
  8. ROE 5 Year Average 06/2011 = 7.56
  9. Return on Investment 12/2011 = 4.1
  10. Return on Investment 09/2011 = 4.1
  11. Return on Investment 06/2011 = 2.57
  12. Debt/Total Cap 5 Year Average 12/2011 = 17.9
  13. Debt/Total Cap 5 Year Average 09/2011 = 17.9
  14. Debt/Total Cap 5 Year Average 06/2011 = 19.45
  1. Current Ratio 12/2011 = 0.83
  2. Current Ratio 09/2011 = 0.83
  3. Current Ratio 06/2011 = 0.82
  4. Current Ratio 5 Year Average = 0.84
  5. Quick Ratio = 0.81
  6. Cash Ratio = 0.04
  7. Interest Coverage Quarterly = 10.76
  1. Valuation
  1. Book Value Quarterly = 14.74
  2. Price/ Book = 0.91
  3. Price/ Cash Flow = 12.64

Conclusion

One of the best ways to open up positions in stocks you are bullish on when the market is in a corrective phase is to sell naked puts at strikes you would not mind owning the stock at. In essence, you are getting paid to put in a "limit order."

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.

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

Additional disclosure: EPS and EPS surprise charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Earnings and growth estimates sourced from dailyfinance.com.

Source: Fifth Third Bank Our Play Of Choice Among 5 Prospective Financial Candidates