For dividend investors, high yields are always nice, but they're even better when they're coming from a company that can sustain them over time. Reasonable payout ratios are part of dividend sustainability, but so is company profitability, as well as having plenty of cash in the bank. Today we focus on companies in the basic materials space, possessing high yields for all the right reasons. We think you'll find our list of companies pretty interesting.
The Current ratio is a liquidity ratio used to determine a company's financial health. The metric illustrates how easily a firm can pay back its short obligations all at once through current assets. A company that has a current ratio of one or less is generally a liquidity red flag. Now this doesn't mean the company will go bankrupt tomorrow, but it also doesn't bode well for the company, and may indicate that it could have an issue paying back upcoming obligations.
The Quick ratio measures a company's ability to use its cash or assets to extinguish its current liabilities immediately. Quick assets include assets that presumably can be converted to cash at close to their book values. A company with a Quick Ratio of less than 1 cannot currently pay back its current liabilities. The quick ratio is more conservative than the Current Ratio because it excludes inventory from current assets, since some companies have difficulty turning their inventory into cash. If short-term obligations need to be paid off immediately, sometimes the current ratio would overestimate a company's short-term financial strength. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
EPS growth (earnings per share growth) illustrates the growth of earnings per share over time. EPS growth rates help investors identify stocks that are increasing or decreasing in profitability. This profitability metric is generally a key driver in the price of the stock as it directly correlates to the profitability of the company as a whole.
Return on Assets [ROA] illustrates how much a company is generating in earnings from its assets alone. This metric gives investors a picture of how profitable the company is relative to the assets in current possession. As well, it lets investors see how efficient and effective management is at generating earnings from the company's assets. While most management teams can probably make money by throwing money at an issue, very few can make very large profits with little investment.
We first looked for basic materials stocks that have a high dividend yield (Div. Yield > 5%). From here, we then looked for companies that have strong liquidity (Current Ratio>2)(Quick Ratio>2). We then screened for businesses that have strong profitability (1-year fiscal EPS Growth Rate>10%)(ROA [TTM]>10%). We did not screen out any market caps.
Do you think these stocks should be trading higher? Use our list along with your own analysis.
1) Terra Nitrogen Company, L.P. (TNH)
Terra Nitrogen Company, L.P. has a Dividend Yield of 8.04%, Payout Ratio of 197.35% , Current Ratio of 4.63, Quick Ratio of 4.18, Earnings Per Share Growth Rate of 91.36% and Return on Assets of 160.31%. The short interest was 5.85% as of 06/04/2012. Terra Nitrogen Company, L.P. engages in the production and sale of nitrogen fertilizer products. It primarily offers anhydrous ammonia and urea ammonium nitrate solutions. Terra Nitrogen GP Inc.
2) CVR Partners, LP (UAN)
CVR Partners, LP has a Dividend Yield of 10.44%, Payout Ratio of 78.40%, Current Ratio of 4.95, Quick Ratio of 4.52, Earnings Per Share Growth Rate of 297.27% and Return on Assets of 25.69%. The short interest was 3.32% as of 06/04/2012. CVR Partners, LP engages in the production, distribution, and marketing of nitrogen fertilizers in North America. Its nitrogen fertilizer products include ammonia and urea ammonium nitrate. The company was founded in 2007 and is based in Sugar Land, Texas.
3) Southern Copper Corp. (SCCO)
Southern Copper Corp. has a Dividend Yield of 7.10%, Payout Ratio of 82.37%, Current Ratio of 3.56, Quick Ratio of 2.92, Earnings Per Share Growth Rate of 51.07% and Return on Assets of 29.91%. The short interest was 5.63% as of 06/04/2012. Southern Copper Corporation engages in mining, exploring, producing, smelting, and refining copper and other minerals in Peru, Mexico, and Chile. It is involved in the mining, milling, and flotation of copper ore to produce copper and molybdenum concentrates; smelting of copper concentrates to produce anode copper; and refining of anode copper to produce copper cathodes, as well as refined silver. The company operates Toquepala and Cuajone mines in the Andes Mountains located to the southeast of the city of Lima, Peru, as well as a smelter and refinery in the coastal city of Ilo, Peru. It also operates La Caridad and Buenavista copper mines, and smelting and refining plants in Mexico.
*Company profiles were sourced from Finviz. Financial data was sourced from Finviz and Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.