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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.

Some reasons to consider Armour Residential REIT (ARR)

  • A very strong yield of 17.10%
  • A good free cash flow yield of 14.36%
  • A very strong quarterly earnings growth rate of 658%
  • Profit margins of 78%
  • EBITDA increased from -$2million in 2009 to $25 million in 2011.
  • Cash flow per share increased from -$0.49 in 2009 to $0.27 in 2011.
  • Sales increased from $8million in 2010 to $118 million in 2011.
  • Year over year projected growth rate of 936% for 2012 (source dailyfinance.com)
  • A decent current and quick ratio of 1.16 and 1.16 respectively
  • $100K invested since its inception would have grown to $130K; If the dividends were reinvested the rate of return would be higher.

Suggested strategy

Investors with patience should consider waiting for a test of the 6.50 ranges before deploying new capital into this play. If you do not want to wait, then consider dividing your money into 2-3 lots. Deploy one lot now and put one aside in case it dips below 6.50. The last lot can be deployed on a weekly close above 7.50. A weekly close above 7.50 will be a bullish development and should result in a test of 8.50 plus ranges.

Important facts investors should be aware in regards to investing and REITs

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.

Company: Armour Residential REIT

Brief Overview

  1. Percentage Held by Insiders = 0.59
  2. Relative Strength 52 weeks = 56
  3. Cash Flow 5-year Average = 0.02
  4. Profit Margin = 78%
  5. Operating Margin = 78%
  6. Quarterly Revenue Growth = 601%
  7. Quarterly Earnings Growth = 658%
  8. Operating Cash Flow = 250.65M
  9. Beta = 0.42
  10. Percentage Held by Institutions = 22.6
  11. Short Percentage of Float = 8.3%

Growth

  1. Net Income ($mil) 12/2011 = -9
  2. Net Income ($mil) 12/2010 = 7
  3. Net Income ($mil) 12/2009 = -2
  4. Net Income Reported Quarterly ($mil) = 24
  5. EBITDA ($mil) 12/2011 = 25
  6. EBITDA ($mil) 12/2010 = 10
  7. EBITDA ($mil) 12/2009 = -2
  8. Cash Flow ($/share) 12/2011 = 0.27
  9. Cash Flow ($/share) 12/2010 = 0.85
  10. Cash Flow ($/share) 12/2009 = -0.49
  11. Sales ($mil) 12/2011 = 118
  12. Sales ($mil) 12/2010 = 8
  13. Sales ($mil) 12/2009 = 0
  14. Annual EPS before NRI 12/2010 = 1.12
  15. Annual EPS before NRI 12/2011 = -0.15

Dividend history

  1. Dividend Yield = 17.00

Dividend sustainability

Payout Ratio = 3.63

Performance

  1. ROE 5 Year Average = 0.87
  2. Return on Investment = -1.32
  3. Current Ratio = 1.16
  4. Current Ratio 5 Year Average = 0.79
  5. Quick Ratio = 1.16
  6. Cash Ratio = 1.09
  7. Interest Coverage Quarterly = N/A

Interesting companies

For investors looking for other ideas detailed data has been provided on two additional companies; additionally our latest article could provide additional ideas Alpha Natural Resources: A Potential 46% On This Speculative play.

Company: Fifth Third Bank (FITB

Free cash flow $1.7 billion

Growth

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

Dividend history

  1. Dividend Yield = 2.34
  2. Dividend Yield 5 Year Average = 2.10
  3. Dividend 5 year Growth = -43

Dividend sustainability

  1. Payout Ratio = 0.20
  2. Payout Ratio 5 Year Average = 0.58

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 8.71
  2. 5 Year History EPS Growth = -13.71
  3. ROE 5 Year Average = 2.31
  4. Current Ratio = 0.95
  5. Current Ratio 5 Year Average = 0.97
  6. Quick Ratio = 0.92
  7. Interest Coverage Quarterly = 4.3
  8. Retention rate= 80%
  9. Long term debt to equity ratio= 0.73

Company: TCF Financial Corp (TCB)

Growth

  1. Net Income ($mil) 12/2011 = 109
  2. Net Income ($mil) 12/2010 = 151
  3. Net Income ($mil) 12/2009 = 94
  4. EBITDA ($mil) 12/2011 = 445
  5. EBITDA ($mil) 12/2010 = 531
  6. EBITDA ($mil) 12/2009 = 415
  7. Cash Flow ($/share) 12/2011 = 1.14
  8. Cash Flow ($/share) 12/2010 = 1.57
  9. Cash Flow ($/share) 12/2009 = 1.21
  10. Sales ($mil) 12/2011 = 1382
  11. Sales ($mil) 12/2010 = 1508
  12. Sales ($mil) 12/2009 = 1484
  13. Annual EPS before NRI 12/2007 = 1.86
  14. Annual EPS before NRI 12/2008 = 0.94
  15. Annual EPS before NRI 12/2009 = 0.54
  16. Annual EPS before NRI 12/2010 = 1.05
  17. Annual EPS before NRI 12/2011 = 0.71

Dividend history

  1. Dividend Yield = 1.8
  2. Dividend Yield 5 Year Average = 3.50
  3. Dividend 5 year Growth = -31

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 6
  2. 5 Year History EPS Growth 12/2011 = -17.35
  3. ROE 5 Year Average 12/2011 = 10.91
  4. Current Ratio 12/2011 = 1.09
  5. Current Ratio 5 Year Average = 1.2
  6. Quick Ratio = 1.2
  7. Cash Ratio = 0.11
  8. Interest Coverage Quarterly = 1.59
  9. Long term debt to equity = 1.28

Conclusion

In general, a great way to get into a stock that you are bullish on is to sell puts at strikes you would not mind owning the stock at. Investors looking for other ideas might find this article to be of interest Turbo-Charge Your Position In American Capital Agency.

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. Earnings and growth estimates sourced from dailyfinance.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: Armour Residential REIT: Is It Time To Jump Into This High Yielding Play?