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Four candidates based on the following criteria have been picked and examined thoroughly below. These are not absolute rules but suggestions to get the novice investor started. The criteria can be adjusted to suit your own specific style of trading. We will also include one company that does not meet with all the requirements as an example of what novice investors should generally shy away from. Telefonica S.A. (NYSE:TEF) is an example of a company that does not fulfill all the above requirements and only investors willing to take on extra risk should consider this play.

A lot of key ratios will be used in this article and it would be good for investors to get a handle on some of the more important key ratios listed below.

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 some time. 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.

Long-term debt-to-equity ratio 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.

Free cash flow yield is obtained by dividing free cash flow per share by the current price of each share. Generally lower ratios are associated with an unattractive investment and vice versa. Free cash flow takes into account capital expenditures and other ongoing costs associated with the day to day to functions of the business. In our view free cash flow yield is a better valuation metric then earnings yield because of the above factors.

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 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 expenditures, then its free cash flow is $300 million. If the share price is $100 and the free cash flow per share is $5, then the 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.

Cash ratio is the ratio of the company's total cash and cash equivalents to its current liabilities. This ratio is used as a measure of a company's liquidity. It allows investors to determine how fast the company would be able to pay its short term debts if push came to shove. Higher numbers are better because it makes it easier for a company to ask for new loans, increase in credit lines, etc.

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.

Retention ratio is the amount of net income that is not paid out as dividends. In other words, it is the money the company retains that can be used to grow the business, etc. It is calculated by subtracting 1 from the dividend ratio.

Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa.

Company: Telefonica S.A. (TEF)

Levered Free Cash Flow = 6.16B

Brief Overview

1. Percentage Held by Insiders = 0.01

2. Relative Strength 52 weeks = 21

3. Cash Flow 5-year Average = 2.11

4. Profit Margin = 7.06%

5. Operating Margin = 17.82%

6. Quarterly Revenue Growth = 0%

7. Quarterly Earnings Growth = -53.9%

8. Operating Cash Flow = 0.0164

9. Beta = 1.56

10. Percentage Held by Institutions

11. Short Percentage of Float

Growth

1. Net Income ($mil) 12/2011 = 8617

2. Net Income ($mil) 12/2010 = 13375

3. Net Income ($mil) 12/2009 = 11072

4. Net Income Reported Quarterly ($mil) = 969

5. EBITDA ($mil) 12/2011 = 9036

6. EBITDA ($mil) 12/2010 = 18459

7. EBITDA ($mil) 12/2009 = 14490

8. Cash Flow ($/share) 12/2011 = 1.55

9. Cash Flow ($/share) 12/2010 = 2.18

10. Cash Flow ($/share) 12/2009 = 2.32

11. Sales ($mil) 12/2011 = 84277

12. Sales ($mil) 12/2010 = 83649

13. Sales ($mil) 12/2009 = 79140

14. Annual EPS before NRI 12/2007 = 0.61

15. Annual EPS before NRI 12/2002 = 2.03

16. Annual EPS before NRI 12/2009 = 2.33

17. Annual EPS before NRI 12/2010 = 6.6

18. Annual EPS before NRI 12/2011 = 4.71

Dividend history

1. Dividend Yield = 11.2

2. Dividend Yield 5 Year Average = 4.91

3. Dividend 5 year Growth = 19.4%

Dividend sustainability

1. Payout Ratio = 1.27

2. Payout Ratio 5 Year Average 12/2011 = 0.44

Performance

1. Next 3-5 Year Estimate EPS Growth rate = 11.11

2. ROE 5 Year Average 12/2011 = 40.33

3. Current Ratio 12/2011 = 0.72

4. Current Ratio 5 Year Average = 0.73

5. Quick Ratio = 0.6

6. Cash Ratio = 0.26

7. Interest Coverage Quarterly = 2.20

Notes

It is still in a strong downtrend and if you are willing to take a risk wait for a test of the $10.00 ranges before jumping in. Ideally it should test this level on lower volume and end the week on a higher note. One way to reduce the risk would be to wait for it to test this level and then sell puts at strikes you would not mind owning the stock at. Only individuals willing to take a risk should consider this play.

Company: Nustar Energy (NYSE:NS)

Levered Free Cash Flow = -123.01M

Brief Overview

1. Percentage Held by Insiders = 2.29

2. Relative Strength 52 weeks = 41

3. Cash Flow 5-year Average = 5.74

4. Profit Margin = 3.1%

5. Operating Margin = 4.33%

6. Quarterly Revenue Growth = 40.6%

7. Quarterly Earnings Growth = -7.5%

8. Operating Cash Flow = 250.65M

9. Beta = 0.76

10. Percentage Held by Institutions = 29.7%

11. Short Percentage of Float = 0.7%

Growth

1. Net Income ($mil) 12/2011 = 222

2. Net Income ($mil) 12/2010 = 239

3. Net Income ($mil) 12/2009 = 225

4. Net Income Reported Quarterly ($mil) = 26

5. EBITDA ($mil) 12/2011 = 478

6. EBITDA ($mil) 12/2010 = 483

7. EBITDA ($mil) 12/2009 = 461

8. Cash Flow ($/share) 12/2011 = 5.57

9. Cash Flow ($/share) 12/2010 = 5.64

10. Cash Flow ($/share) 12/2009 = 5.82

11. Sales ($mil) 12/2011 = 6575

12. Sales ($mil) 12/2010 = 4403

13. Sales ($mil) 12/2009 = 3856

14. Annual EPS before NRI 12/2007 = 2.58

15. Annual EPS before NRI 12/2008 = 4.07

16. Annual EPS before NRI 12/2009 = 3.03

17. Annual EPS before NRI 12/2010 = 2.89

18. Annual EPS before NRI 12/2011 = 2.97

(click to enlarge)

Dividend history

1. Dividend Yield = 8.70

2. Dividend Yield 5 Year Average = 7.80

3. Dividend 5 year Growth = 3.86

Dividend sustainability

1. Payout Ratio = 1.7

2. Payout Ratio 5 Year Average = 1.36

Performance

1. Next 3-5 Year Estimate EPS Growth rate = 6.45

2. ROE 5 Year Average = 8.87

3. Current Ratio = 0.92

4. Current Ratio 5 Year Average = 1.77

5. Quick Ratio = 0.65

6. Cash Ratio = 0.07

7. Interest Coverage Quarterly = 2.33

Company: Schlumberger Lt (NYSE:SLB)

Basic overview

1. Percentage Held by Insiders = 0.21

2. Levered free cash flow = $1.09 billion

3. Relative Strength 52 weeks = 41

4. Cash Flow 5-year Average = 5.34

5. Dividend Yield 5-Year Average = 1.25

Growth

1. Net Income ($mil) 12/2011 = 4997

2. Net Income ($mil) 12/2010 = 4267

3. Net Income ($mil) 12/2009 = 3134

4. Net Income Reported Quarterly ($mil) = 1301

5. EBITDA ($mil) 12/2011 = 9917

6. EBITDA ($mil) 12/2010 = 8122

7. EBITDA ($mil) 12/2009 = 6631

8. Cash Flow ($/share) 12/2011 = 6.15

9. Cash Flow ($/share) 12/2010 = 4.66

10. Cash Flow ($/share) 12/2009 = 4.86

11. Sales ($mil) 12/2011 = 39540

12. Sales ($mil) 12/2010 = 27447

13. Sales ($mil) 12/2009 = 22702

14. Annual EPS before NRI 12/2009 = 2.78

15. Annual EPS before NRI 12/2010 = 2.86

16. Annual EPS before NRI 12/2011 = 3.66

(click to enlarge)

Dividend history

1. Dividend Yield = 1.7

2. Dividend Yield 5 Year Average = 1.25

3. Dividend 5 year Growth = 11.77

Dividend sustainability

1. Payout Ratio = 0.28

2. Payout Ratio 5 Year Average 12/2011 = 0.25

Performance

1. Next 3-5 Year Estimate EPS Growth rate = 13

2. 5 Year History EPS Growth 12/2011 = -6.79

3. ROE 5 Year Average 12/2011 = 24.42

4. Return on Investment 12/2011 = 13.37

5. Current Ratio 12/2011 = 1.97

6. Current Ratio 5 Year Average = 1.73

7. Quick Ratio = 1.5

8. Cash Ratio = 0.6

9. Interest Coverage = 23

10. Retention rate= 72%

Company: Total SA (NYSE:TOT)

Basic overview

1. Levered Free Cash Flow = $2.2 billion

2. Quarterly revenue growth = 12%

3. Profit margins = 6.98%

4. Operating margins = 14.1%

5. Beta = 1.42

Growth

1. Net Income ($mil) 12/2011 = 17523

2. Net Income ($mil) 12/2010 = 14351

3. Net Income ($mil) 12/2009 = 12034

4. EBITDA ($mil) 12/2011 = 50134

5. EBITDA ($mil) 12/2010 = 40482

6. EBITDA ($mil) 12/2009 = 33494

7. Cash Flow ($/share) 12/2011 = 11.51

8. Cash Flow ($/share) 12/2010 = 11.13

9. Cash Flow ($/share) 12/2009 = 9.3

10. Sales ($mil) 12/2011 = 245420

11. Sales ($mil) 12/2010 = 217573

12. Sales ($mil) 12/2009 = 183201

13. Anl EPS before NRI 12/2009 = 4.85

14. Anl EPS before NRI 12/2010 = 6.26

15. Anl EPS before NRI 12/2011 = 6.72

(click to enlarge)

Dividend history

1. Dividend Yield = 5.9

2. Dividend Yield 5 Yr Average = 4.8

3. Dividend 5yr Growth = 5.14%

Dividend sustainability

1. Payout Ratio = 0.47

2. Payout Ratio 5 Yr Average = 0.43

Performance

1. 5 Yr Historical EPS Growth = -5.66

2. ROE 5 Yr Average = 23.71

3. Current Ratio = 1.36

4. Current Ratio 5 Yr Average = 1.39

5. Quick Ratio = 0.98

6. Cash Ratio = 0.55

7. Interest Coverage 12/2011 = 36.83

8. Retention rate= 53%

Conclusion

In general, 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 ideas might find this article to be of interest - Seadrill Ltd: Time To Take A Closer Look At This High dividend play.

Disclaimer

It is imperative that you do your due diligence and then determine if the above strategy meets with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.

Source: Telefonica 1 Of 4 Plays With Yields As High As 11% To Take A Deeper Look At

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.