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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. The suggested guidelines can be accessed here - "Our suggested guidelines when searching for new investment ideas." These are not absolute rules; they are just suggestions and there are always exceptions to the rule. The goal is to try to satisfy as many of them as possible.

Reasons to like 3M Company (NYSE:MMM):

  • Net income has increased from $3.19 billion to $4.2 billion in 2011
  • Year over projected growth rates of 7.7% and 8.8% for 2012 and 2013 respectively
  • A 5 year sales growth rate of 4.18% which is not a bad for a mature company
  • A great long-term debt to equity ratio of 0.28
  • EBITDA increased from $6 billion in 2009 to $7.4 billion in 2011
  • Cash flow increased from $6.31 in 2007 to $7.88 in 2011
  • A low payout ratio of 39%
  • A 3-5 year EPS projected growth rate of 11.75%
  • A good five year ROE average of 29.3%
  • Sales increased from $23 billion in 2009 to $29.6 billion in 2011
  • Annual EPS before NRI increased from $4.98 in 2007 to $5.96 in 2011
  • An excellent interest rate coverage ratio of 41
  • Great current and quick ratios of 2.38 and 1.97 respectively
  • Operating margin of 21%
  • A strong levered free cash flow of 3.3 billion
  • A good free cash flow yield of 6.6%
  • Strong institutional support; percentage held by institution is 69%
  • A true dividend champ; It has consecutively increased its dividend for 53 years
  • A decent three year total return of 59%
  • Acquisitions like Winterthur and Alpha Beta show that management is focused on quality. Sales rose in every region of the world in locally based currencies, with Asia pacific increasing by 3%, Europe by 4%, Latin America/Canada swelling by 10% and United States by 7%
  • Free cash flow for the quarter was$1.2 billion, an increase of $116 million year over year
  • $100K invested for 10 years would have grown to $162K; if the dividend was reinvested the rate of return would be even higher

Company: 3M Company

Basic Key ratios

  1. Number of Institutional Sellers 12 Weeks = 4
  2. Relative Strength 52 weeks = 55
  3. Cash Flow 5-year Average = 6.79

Growth

  1. Net Income ($mil) 12/2011 = 4283
  2. Net Income ($mil) 12/2010 = 4085
  3. Net Income ($mil) 12/2009 = 3193
  4. Net Income Reported Quarterly ($mil) = 1125
  1. EBITDA ($mil) 12/2011 = 7453
  2. EBITDA ($mil) 12/2010 = 7076
  3. EBITDA ($mil) 12/2009 = 6008
  1. Cash Flow ($/share) 12/2011 = 7.88
  2. Cash Flow ($/share) 12/2010 = 7.4
  3. Cash Flow ($/share) 12/2009 = 6.31
  1. Sales ($mil) 12/2011 = 29611
  2. Sales ($mil) 12/2010 = 26662
  3. Sales ($mil) 12/2009 = 23123
  1. Annual EPS before NRI 12/2007 = 4.98
  2. Annual EPS before NRI 12/2008 = 5.16
  3. Annual EPS before NRI 12/2009 = 4.69
  4. Annual EPS before NRI 12/2010 = 5.75
  5. Annual EPS before NRI 12/2011 = 5.96

Dividend history

  1. Dividend Yield = 2.8
  2. Dividend Yield 5 Year Average 12/2011 = 2.69
  3. Dividend 5 year Growth 12/2011 = 3.54
  4. Payout Ratio 09/2011 = 0.39

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 11.75
  2. 5 Year History EPS Growth 12/2011 = 5.04
  3. ROE 5 Year Average 12/2011 = 29.32
  4. Return on Investment 12/2011 = 20.11
  5. Current Ratio 12/2011 = 2.38
  6. Current Ratio 5 Year Average = 1.97
  7. Quick Ratio = 1.62
  8. Interest Coverage Quarterly = 41.08

Company: Cummins Inc (NYSE:CMI)

Basic Key ratios

  1. Percentage Held by Insiders = 0.45
  2. Number of Institutional Sellers 12 Weeks = 4
  3. Relative Strength 52 weeks = 58
  4. Dividend 5-year Growth = 31.03
  5. Cash Flow 5-year Average = 5.59
  6. Dividend Yield 5-Year Average = 1.37

Growth

  1. Net Income ($mil) 12/2011 = 1848
  2. Net Income ($mil) 12/2010 = 1040
  3. Net Income ($mil) 12/2009 = 428
  4. Net Income Reported Quarterly ($mil) = 455
  1. EBITDA ($mil) 12/2011 = 3040
  2. EBITDA ($mil) 12/2010 = 1977
  3. EBITDA ($mil) 12/2009 = 1001
  1. Cash Flow ($/share) 12/2011 = 10.63
  2. Cash Flow ($/share) 12/2010 = 6.77
  3. Cash Flow ($/share) 12/2009 = 4.06
  1. Sales ($mil) 12/2011 = 18048
  2. Sales ($mil) 12/2010 = 13226
  3. Sales ($mil) 12/2009 = 10800
  1. Annual EPS before NRI 12/2007 = 3.7
  2. Annual EPS before NRI 12/2008 = 4.21
  3. Annual EPS before NRI 12/2009 = 2.49
  4. Annual EPS before NRI 12/2010 = 5.17
  5. Annual EPS before NRI 12/2011 = 8.92

Dividend history

  1. Dividend Yield = 1.6
  2. Dividend Yield 5 Year Average 12/2011 = 1.37
  3. Annual Dividend 12/2011 = 1.33
  4. Dividend 5 year Growth 12/2011 = 31.03

Dividend sustainability

  1. Payout Ratio 09/2011 = 0.17
  2. Payout Ratio 5 Year Average 12/2011 = 0.19

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 22.23
  2. 5 Year History EPS Growth 12/2011 = 20.24
  3. ROE 5 Year Average 12/2011 = 22.42
  4. Return on Investment 12/2011 = 28.34
  5. Debt/Total Cap 5 Year Average 12/2011 = 14.9
  6. Current Ratio 12/2011 = 2.02
  7. Current Ratio 5 Year Average = 1.91
  8. Quick Ratio = 1.35
  9. Cash Ratio = 0.66
  10. Interest Coverage Quarterly = 82.25

Company: Weatherford International (NYSE:WFT)

Basic Key ratios

  1. Percentage Held by Insiders = 2
  2. Relative Strength 52 weeks = 29
  3. Cash Flow 5-year Average = 2.11

Growth

  1. Net Income ($mil) 12/2011 = 262
  2. Net Income ($mil) 12/2010 = -152
  3. Net Income ($mil) 12/2009 = 124
  4. Net Income Reported Quarterly ($mil) = 123
  1. EBITDA ($mil) 12/2011 = 2352
  2. EBITDA ($mil) 12/2010 = 1658
  3. EBITDA ($mil) 12/2009 = 1563
  1. Cash Flow ($/share) 12/2011 = 1.85
  2. Cash Flow ($/share) 12/2010 = 1.21
  3. Cash Flow ($/share) 12/2009 = 1.73
  1. Sales ($mil) 12/2011 = 12990
  2. Sales ($mil) 12/2010 = 10221
  3. Sales ($mil) 12/2009 = 8827
  1. Annual EPS before NRI 12/2009 = 0.5
  2. Annual EPS before NRI 12/2010 = -0.2
  3. Annual EPS before NRI 12/2011 = 0.34

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 49.77
  2. 5 Year History EPS Growth 12/2011 = -40.53
  3. ROE 5 Year Average 12/2011 = 8.24
  4. Return on Investment 12/2011 = 2.59
  1. Current Ratio 12/2011 = 1.67
  2. Current Ratio 5 Year Average = 2.3
  3. Quick Ratio = 1.08
  4. Cash Ratio = 0.31
  5. Interest Coverage Quarterly = 3.38

Company: Tyco Intl Ltd (NYSE:TYC)

Basic Key ratios

  1. Number of Institutional Sellers 12 Weeks = 1
  2. Relative Strength 52 weeks = 76
  3. Dividend 5-year Growth = 6.05
  4. Cash Flow 5-year Average = 7.24
  5. Dividend Yield 5-Year Average = 2.26

Growth

  1. Net Income ($mil) 12/2011 = 1733
  2. Net Income ($mil) 12/2010 = 1132
  3. Net Income ($mil) 12/2009 = -1798
  4. Net Income Reported Quarterly ($mil) = 327
  1. EBITDA ($mil) 12/2011 = 3467
  2. EBITDA ($mil) 12/2010 = 2778
  3. EBITDA ($mil) 12/2009 = 2387
  4. Cash Flow ($/share) 12/2011 = 6.2
  5. Cash Flow ($/share) 12/2010 = 5.09
  6. Cash Flow ($/share) 12/2009 = 10.5
  1. Sales ($mil) 12/2011 = 17355
  2. Sales ($mil) 12/2010 = 17016
  3. Sales ($mil) 12/2009 = 17237
  1. Annual EPS before NRI 12/2007 = 1.93
  2. Annual EPS before NRI 12/2008 = 3.04
  3. Annual EPS before NRI 12/2009 = 2.36
  4. Annual EPS before NRI 12/2010 = 2.68
  5. Annual EPS before NRI 12/2011 = 3.24

Dividend history

  1. Dividend Yield = 1.90
  2. Dividend Yield 5 Year Average 12/2011 = 2.26
  3. Dividend 5 year Growth 12/2011 = 6.05

Dividend sustainability

  1. Payout Ratio 09/2011 = 0.29
  2. Payout Ratio 5 Year Average 12/2011 = 0.28

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 12.3
  2. 5 Year History EPS Growth 12/2011 = -5.61
  3. ROE 5 Year Average 12/2011 = 9.63
  4. Return on Investment 12/2011 = 8.81
  5. Current Ratio 12/2011 = 1.51
  6. Current Ratio 5 Year Average = 1.54
  7. Quick Ratio = 1.18
  8. Cash Ratio = 0.62
  9. Interest Coverage Quarterly = 8.07

Company: Sandridge Energy (NYSE:SD)

Basic Key ratios

  1. Percentage Held by Insiders = 5.98
  2. Number of Institutional Sellers 12 Weeks = 3
  3. Relative Strength 52 weeks = 26
  4. Cash Flow 5-year Average = 1.83

Growth

  1. Net Income ($mil) 12/2011 = 108
  2. Net Income ($mil) 12/2010 = 191
  3. Net Income ($mil) 12/2009 = -1776
  4. Net Income Reported Quarterly ($mil) = -218
  5. EBITDA ($mil) 12/2011 = 788
  6. EBITDA ($mil) 12/2010 = 335
  7. EBITDA ($mil) 12/2009 = -1361
  8. Cash Flow ($/share) 12/2011 = 1.09
  9. Cash Flow ($/share) 12/2010 = 1.03
  10. Cash Flow ($/share) 12/2009 = 1.87
  11. Sales ($mil) 12/2011 = 1415
  12. Sales ($mil) 12/2010 = 932
  13. Sales ($mil) 12/2009 = 591
  14. Annual EPS before NRI 12/2009 = 0.65
  15. Annual EPS before NRI 12/2010 = 0.11
  16. Annual EPS before NRI 12/2011 = 0.01

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 218.1
  2. 5 Year History EPS Growth 12/2011 = -53.18
  3. ROE 5 Year Average 12/2011 = 16.03
  4. Return on Investment 12/2011 = 1.12
  1. Current Ratio 12/2011 = 0.55
  2. Current Ratio 09/2011 = 0.55
  3. Current Ratio 06/2011 = 0.63
  4. Current Ratio 5 Year Average = 0.8
  5. Quick Ratio = 0.62
  6. Cash Ratio = 0.33
  7. Interest Coverage Quarterly = N/A

Conclusion

The markets are extremely oversold and it looks like Monday's rally might be the beginning of the relief rally we have been expecting. However, we still believe there is more downside to this market. We will need to witness one or two more selling climaxes, followed by 1-2 days where the market closes in the red on low volume before a bottom is in place. Long-term investors can use strong pullbacks to slowly start deploying money into long-term investments. A great way to get into a stock at a price of your choosing is to sell puts at strikes you would not mind owning the stock at. Investors looking for other investment ideas might find these articles to be of interest: General Electric: An Option Strategy That Could Potentially triple your yield and Frontier Communications A Perfect Candidate For A Short squeeze.

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 Price Vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Data for Ycharts sourced from Ycharts.com.

Source: 3M Company Among 3 Prospective Dividend And 2 Growth Plays