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. A lot of data has been provided so it should be relatively easy for an investor to scroll down the list and decide if a stock warrants further attention.
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 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
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 a company has a high operating cash flow and access to capital markets, it 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.
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.
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.
Company: Visa Inc-A (V)
Basic overview
- Long term debt to equity ratio = 0.23
- Short ratio = 2.9%
- Percentage held by institutions = 82%
- Quarterly earnings growth = 46%
- Quarterly revenue growth = 14.8%
- Profit Margins = 42.7%
- Beta = 0.79
- Operating cash flow = $4.65B
- Levered free cash flow = $2.46B
Growth
- Net Income ($mil) 12/2011 = 3650
- Net Income ($mil) 12/2010 = 2966
- Net Income ($mil) 12/2009 = 2353
- EBITDA ($mil) 12/2011 = 7856
- EBITDA ($mil) 12/2010 = 6535
- EBITDA ($mil) 12/2009 = 5575
- Cash Flow ($/share) 12/2011 = 6.97
- Cash Flow ($/share) 12/2010 = 5.65
- Cash Flow ($/share) 12/2009 = 4.34
- Sales ($mil) 12/2011 = 9188
- Sales ($mil) 12/2010 = 8065
- Sales ($mil) 12/2009 = 6911
- Annual EPS before NRI 12/2008 = 2.25
- Annual EPS before NRI 12/2009 = 2.92
- Annual EPS before NRI 12/2010 = 3.91
- Annual EPS before NRI 12/2011 = 4.99
Click to enlarge
Dividend history
- Dividend Yield = 0.7
- Dividend 3 year Growth =30%
- Payout Ratio = 0.17
Performance
- Next 3-5 Year Estimate EPS Growth rate = 16.43
- ROE 5 Year Average = 11.12
- Current Ratio = 2.89
- Quick Ratio = 1.10
- Interest Coverage Quarterly = 150
Company: Bp Plc (BP)
Basic overview
- Long term debt to equity ratio = 0.33
- 5 year sales growth rate = 4.88%
- Capital spending 5 year growth rate = 6.18
- Sales vs 1 year ago = 27.8%
- Short ratio = 1.00%
- Quarterly earnings growth = -18%
- Quarterly revenue growth = 10%
- Profit Margins = 6.3%
- Operating margins = 7.6%
- Beta = 1.94
- Operating cash flow = $23.1B
- Levered free cash flow = $11B
Growth
- Net Income ($mil) 12/2011 = 25700
- Net Income ($mil) 12/2010 = -3719
- Net Income ($mil) 12/2009 = 16578
- EBITDA ($mil) 12/2011 = 49969
- EBITDA ($mil) 12/2010 = 6339
- EBITDA ($mil) 12/2009 = 37230
- Cash Flow ($/share) 12/2011 = 10.94
- Cash Flow ($/share) 12/2010 = 10.5
- Cash Flow ($/share) 12/2009 = 9.67
- Sales ($mil) 12/2011 = 386463
- Sales ($mil) 12/2010 = 308928
- Sales ($mil) 12/2009 = 246138
- Annual EPS before NRI 12/2007 = 5.01
- Annual EPS before NRI 12/2008 = 7.08
- Annual EPS before NRI 12/2009 = 5.76
- Annual EPS before NRI 12/2010 = 9.17
- Annual EPS before NRI 12/2011 = 7.36
Dividend history
- Dividend Yield = 5.00
- Dividend Yield 5 Year Average = 5.6%
- Dividend 5 year Growth = - 13%
Dividend sustainability
- Payout Ratio = 0.23
- Payout Ratio 5 Year Average = 0.38
Performance
- Next 3-5 Year Estimate EPS Growth rate = 4
- 5 Year History EPS Growth = 4.01
- ROE 5 Year Average = 21.1
- Current Ratio = 1.20
- Current Ratio 5 Year Average = 1.09
- Quick Ratio = 0.7
- Cash Ratio = 0.33
- Interest Coverage = 30.60
- Retention rate = 77%
Company: 3M Company (MMM)
- Long term debt to equity ratio = 0.28
- 5 year sales growth rate = 4.18%
- Capital spending 5 year growth rate = 19.86%
- Short ratio = 2.5%
- Quarterly earnings growth = 4.10%
- Quarterly revenue growth = 2.4%
- Profit Margins = 14.5%
- Beta = 1.09
- Operating cash flow = $5.38B
- Levered free cash flow = $3.34B
- Relative Strength 52 weeks = 55
- Cash Flow 5-year Average = 6.79
Growth
- Net Income ($mil) 12/2011 = 4283
- Net Income ($mil) 12/2010 = 4085
- Net Income ($mil) 12/2009 = 3193
- Net Income Reported Quarterly ($mil) = 1125
- EBITDA ($mil) 12/2011 = 7453
- EBITDA ($mil) 12/2010 = 7076
- EBITDA ($mil) 12/2009 = 6008
- Cash Flow ($/share) 12/2011 = 7.88
- Cash Flow ($/share) 12/2010 = 7.4
- Cash Flow ($/share) 12/2009 = 6.31
- Sales ($mil) 12/2011 = 29611
- Sales ($mil) 12/2010 = 26662
- Sales ($mil) 12/2009 = 23123
- Annual EPS before NRI 12/2007 = 4.98
- Annual EPS before NRI 12/2008 = 5.16
- Annual EPS before NRI 12/2009 = 4.69
- Annual EPS before NRI 12/2010 = 5.75
- Annual EPS before NRI 12/2011 = 5.96
Dividend history
- Dividend Yield = 2.7
- Dividend Yield 5 Year Average = 2.7
- Dividend 5 year Growth = 3.24
- Payout Ratio = 0.37
Performance
- Next 3-5 Year Estimate EPS Growth rate = 11.75
- 5 Year History EPS Growth = 5.04
- ROE 5 Year Average = 29.32
- Return on Investment = 20.11
- Current Ratio = 2.40
- Current Ratio 5 Year Average = 1.97
- Quick Ratio = 1.5
- Interest Coverage = 33.90
Company: Waste Management (WM)
Levered Free Cash Flow = 734.25M
Brief Overview
- Percentage Held by Insiders = 0.29
- Number of Institutional Sellers 12 Weeks = 1
- 5. Relative Strength 52 weeks = 50
- 6. Cash Flow 5-year Average = 4.75
- 7. Profit Margin = 6.97%
- 8. Operating Margin = 15.18%
- 9. Quarterly Revenue Growth = 0%
- 10. Quarterly Earnings Growth = -8.1%
- 11. Operating Cash Flow = -0.0079
- 12. Beta = 66%
- 13. Percentage Held by Institutions = 79.9%
- 14. Short Percentage of Float = 6.4%
Growth
- Net Income ($mil) 12/2011 = 961
- Net Income ($mil) 12/2010 = 953
- Net Income ($mil) 12/2009 = 994
- Net Income Reported Quarterly ($mil) = 171
- EBITDA ($mil) 12/2011 = 3337
- EBITDA ($mil) 12/2010 = 3388
- EBITDA ($mil) 12/2009 = 3115
- Cash Flow ($/share) 12/2011 = 5.1
- Cash Flow ($/share) 12/2010 = 4.87
- Cash Flow ($/share) 12/2009 = 4.49
- Sales ($mil) 12/2011 = 13378
- Sales ($mil) 12/2010 = 12515
- Sales ($mil) 12/2009 = 11791
- Annual EPS before NRI 12/2007 = 2.07
- Annual EPS before NRI 12/2002 = 2.21
- Annual EPS before NRI 12/2009 = 2
- Annual EPS before NRI 12/2010 = 2.14
- Annual EPS before NRI 12/2011 = 2.14
Dividend history
- Dividend Yield = 4.36
- Dividend Yield 5 Year Average = 3.51
- Annual Dividend = 1.36
- Dividend 5 year Growth = 8.4%
Dividend sustainability
- 2. Payout Ratio 5 Year Average = 0.68
- Payout Ratio 5 Year Average = 0.57
Performance
- Next 3-5 Year Estimate EPS Growth rate = 7.5
- ROE 5 Year Average 12/2011 = 16.73
- Current Ratio 03/2012 = 0.7
- Current Ratio 5 Year Average = 0.98
- Quick Ratio = 0.73
- Cash Ratio = 0.15
- Interest Coverage Quarterly = 3.23
Conclusion
The markets are still in a corrective phase, so investors can use pullbacks to deploy money into new positions. We expect the markets to generally trend upwards until about August at which point they could potentially put in another multi-month top. Investors looking for other ideas might find this article to be of interest: Wells Fargo: In At $27.05 Or Get Paid 9.8% In 7 Months.
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.
Disclaimer: It is imperative that you do your due diligence and then determine if the above plays meets 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.
