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Investors should not go after a stock simply because it offers a lofty yield. There are many stocks that offer lofty yields, but their performance over the years has been dismal. In some instances even with the high yield the total rate of return has been negative for the past 3-5 years. Novice Investors can use "this guide "as a means to help you determine which stocks you should get into and which ones to avoid. These are not absolute rules. They are just suggestions to help get you started and please note there are always exceptions to the rule. The goal is to try to satisfy as many of them as possible. As we are going to cover some MLPs, investors would do well to familiarize themselves with the information provided below.

Important facts investors should be aware in regards to investing in MLPs

Payout ratios are not that important when it comes to MLPs, which generally pay a majority of their cash flow as distributions. Payout ratios are calculated by dividing the dividend/distribution rate by the net income per share, and this is why the payout ratio for MLPs is often higher than 100%. The more important ratio to focus on is the cash flow per unit. If one focuses on the cash flow per unit, one will see that in most cases, it exceeds the distribution declared per unit.

MLPs are not taxed like regular corporations because they pay out a large portion of their income to partners (as an investor you are basically a partner and are allocated units instead of shares) usually through quarterly distributions. The burden is thus shifted to the partners who are taxed at their ordinary income rates. As ordinary income tax rates of investors are typically lower than the income tax assessed on corporations, this arrangement is advantageous to the MLPs and generally most investors.

MLPs issue a Schedule K-1 to their investors. Unrelated business income (UBI) above $1,000 is taxable in an IRA. This information will appear Box 20 in the schedule K-1. UBI is typically a very small number usually well below $1000 and in some cases negative. If the MLP pays out distributions in excess of the income it generates, the distribution is classified as a "return of capital" and tax deferred until you sell your units. For more information on this topic investors can visit the National Association of Publicly Traded Partnerships.

Company: Chubb Corp (NYSE:CB)

Brief Overview

  1. Percentage Held by Insiders = 0.61
  2. Number of Institutional Sellers 12 Weeks = 2
  3. Short Ratio = 2.7
  4. Levered Free Cash Flow = 2.33B
  5. Relative Strength 52 weeks = 79
  6. Cash Flow 5-year Average = 7.08
  7. Profit Margin = 12.37%
  8. Operating Margin = 18.01%
  9. Quarterly Revenue Growth = 3.00%
  10. Quarterly Earnings Growth = 10.8%
  11. Operating Cash Flow = 1.77B
  12. Beta = 0.57
  13. Percentage Held by Institutions = 85.5%
  14. Short Percentage of Float = 1.7%

Growth

  1. Net Income ($mil) 12/2011 = 1678
  2. Net Income ($mil) 12/2010 = 2174
  3. Net Income ($mil) 12/2009 = 2183
  4. Net Income Reported Quarterly ($mil) = 506
  5. EBITDA ($mil) 12/2011 = 2404
  6. EBITDA ($mil) 12/2010 = 3205
  7. EBITDA ($mil) 12/2009 = 3199
  8. Cash Flow ($/share) 12/2011 = 6.1
  9. Cash Flow ($/share) 12/2010 = 6.93
  10. Cash Flow ($/share) 12/2009 = 7.04
  11. Sales ($mil) 12/2011 = 13227
  12. Sales ($mil) 12/2010 = 12775
  13. Sales ($mil) 12/2009 = 12877
  14. Annual EPS before NRI 12/2007 = 6.4
  15. Annual EPS before NRI 12/2008 = 5.58
  16. Annual EPS before NRI 12/2009 = 6.14
  17. Annual EPS before NRI 12/2010 = 5.9
  18. Annual EPS before NRI 12/2011 = 5.12

Dividend history

  1. Dividend Yield = 2.3
  2. Dividend Yield 5 Year Average 03/2012 = 2.62
  3. Annual Dividend 12/2011 = 1.56
  4. Dividend 5 year Growth 03/2012 = 6.64

Dividend sustainability

  1. Payout Ratio 03/2012 = 0.27
  2. Payout Ratio 5 Year Average 03/2012 = 0.25

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 8.6
  2. ROE 5 Year Average 03/2012 = 13.82
  3. Debt/Total Cap 5 Year Average 03/2012 = 20.74
  4. Current Ratio = 0.19
  5. Current Ratio 5 Year Average = 0.36
  6. Quick Ratio = 0.2
  7. Cash Ratio = 0.06
  8. Interest Coverage Quarterly = N/A
  9. Retention ratio= 79%

Company: Pepco Holdings (NYSE:POM)

Levered Free Cash Flow = -272.12M

Brief Overview

  1. Percentage Held by Insiders = 0.28
  2. Number of Institutional Sellers 12 Weeks = 1
  3. Short Ratio = 12
  4. Relative Strength 52 weeks = 62
  5. Cash Flow 5-year Average = 3.11
  6. Profit Margin = 4.68%
  7. Operating Margin = 10.54%
  8. Quarterly Revenue Growth = -20.9%
  9. Quarterly Earnings Growth = 6.2%
  10. Operating Cash Flow = 512.00M
  11. Beta = 0.35
  12. Percentage Held by Institutions = 58.4%
  13. Short Percentage of Float = 10%

Growth

  1. Net Income ($mil) 12/2011 = 257
  2. Net Income ($mil) 12/2010 = 32
  3. Net Income ($mil) 12/2009 = 235
  4. Net Income Reported Quarterly ($mil) = 68
  5. EBITDA ($mil) 12/2011 = 1089
  6. EBITDA ($mil) 12/2010 = 849
  7. EBITDA ($mil) 12/2009 = 1016
  8. Cash Flow ($/share) 12/2011 = 3.12
  9. Cash Flow ($/share) 12/2010 = 2.98
  10. Cash Flow ($/share) 12/2009 = 2.49
  11. Sales ($mil) 12/2011 = 5920
  12. Sales ($mil) 12/2010 = 7039
  13. Sales ($mil) 12/2009 = 9259
  14. Annual EPS before NRI 12/2007 = 1.53
  15. Annual EPS before NRI 12/2008 = 1.93
  16. Annual EPS before NRI 12/2009 = 0.91
  17. Annual EPS before NRI 12/2010 = 1.24
  18. Annual EPS before NRI 12/2011 = 1.25

Dividend history

  1. Dividend Yield = 5.50
  2. Dividend Yield 5 Year Average 03/2012 = 5.73
  3. Annual Dividend 12/2011 = 1.08
  4. Dividend 5 year Growth 03/2012 = 0.41

Dividend sustainability

  1. Payout Ratio = 0.93
  2. Payout Ratio 5 Year Average 03/2012 = 0.82

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 3.57
  2. ROE 5 Year Average 03/2012 = 7.09
  3. Debt/Total Cap 5 Year Average 03/2012 = 52.17
  4. Current Ratio = 0.64
  5. Current Ratio 5 Year Average = 0.94
  6. Quick Ratio = 0.7
  7. Cash Ratio = 0.2
  8. Interest Coverage Quarterly = 2.26

Company: The Goldman Sachs Group (NYSE:GS)

Brief Overview

  1. Percentage Held by Insiders = 6.75%
  2. Profit Margin = 14.2%
  3. Operating Margin = 20.85%
  4. Quarterly Revenue Growth = - 9 %
  5. Quarterly Earnings Growth= - 11.5%
  6. Operating Cash Flow = 23.28B
  7. Beta = 1.63
  8. Percentage Held by Institutions = 20%
  9. Short Percentage of Float = 1.2%
  10. Sales vs 1 year ago = -20%
  11. Long term debt to equity ratio = 2.50

Growth

  1. Net Income ($mil) 12/2011 = 4442
  2. Net Income ($mil) 12/2010 = 8354
  3. Net Income ($mil) 12/2009 = 13385
  4. EBITDA ($mil) 12/2011 = 16020
  5. EBITDA ($mil) 12/2010 = 21602
  6. EBITDA ($mil) 12/2009 = 28272
  7. Cash Flow ($/share) 12/2011 = 12.82
  8. Cash Flow ($/share) 12/2010 = 22.23
  9. Cash Flow ($/share) 12/2009 = 29.82
  10. Sales ($mil) 12/2011 = 28811
  11. Sales ($mil) 12/2010 = 39161
  12. Sales ($mil) 12/2009 = 51673
  13. Annual EPS before NRI 12/2007 = 24.73
  14. Annual EPS before NRI 12/2008 = 4.47
  15. Annual EPS before NRI 12/2009 = 22.13
  16. Annual EPS before NRI 12/2010 = 15.22
  17. Annual EPS before NRI 12/2011 = 4.51

Dividend history

  1. Dividend Yield = 2.00
  2. Dividend Yield 5 Year Average = 1.01
  3. Dividend 5 year Growth = 0.11

Dividend sustainability

  1. Payout Ratio = 0.20
  2. Payout Ratio 5 Year Average = 0.14

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 21.33
  2. E5 Year History EPS Growth = -17.92
  3. ROE 5 Year Average = 17.22
  4. Return on Investment = 1.55
  5. Debt/Total Cap 5 Year Average = 76.46
  6. Current Ratio = 0.79
  7. Current Ratio 5 Year Average = 0.99
  8. Quick Ratio = 0.79
  9. Interest Coverage = 1.70
  10. Retention rate = 80%

Company: Breitburn Energy (NASDAQ:BBEP)

Levered Free Cash Flow = -222.03M

Brief Overview

  1. Percentage Held by Insiders = 3.11
  2. Short Ratio = 1.5
  3. Relative Strength 52 weeks = 49
  4. Cash Flow 5-year Average = 2.91
  5. Profit Margin = 38.85%
  6. Operating Margin = 53.15%
  7. Quarterly Revenue Growth = 1.8%
  8. Operating Cash Flow = 145.44M
  9. Beta = 0.41
  10. Percentage Held by Institutions = 27.7%
  11. Short Percentage of Float = 1.00%

Growth

  1. Net Income ($mil) 12/2011 = 110
  2. Net Income ($mil) 12/2010 = 35
  3. Net Income ($mil) 12/2009 = -107
  4. Net Income Reported Quarterly ($mil) = -50
  5. EBITDA ($mil) 12/2011 = 259
  6. EBITDA ($mil) 12/2010 = 163
  7. EBITDA ($mil) 12/2009 = 20
  8. Cash Flow ($/share) 12/2011 = 2.31
  9. Cash Flow ($/share) 12/2010 = 2.87
  10. Cash Flow ($/share) 12/2009 = 2.86
  11. Sales ($mil) 12/2011 = 480
  12. Sales ($mil) 12/2010 = 318
  13. Sales ($mil) 12/2009 = 205
  14. Annual EPS before NRI 12/2007 = 1.36
  15. Annual EPS before NRI 12/2008 = 1.65
  16. Annual EPS before NRI 12/2009 = 0.78
  17. Annual EPS before NRI 12/2010 = 0.87
  18. Annual EPS before NRI 12/2011 = 0.46

Dividend history

  1. Dividend Yield = 10.0%
  2. Dividend Yield 5 Year Average 03/2012 = 11.12
  3. Annual Dividend 12/2011 = 1.71
  4. Dividend 5 year Growth 03/2012 = -1.88

Dividend sustainability

  1. Payout Ratio = 0.68
  2. Payout Ratio 5 Year Average 03/2012 = 2.11

Performance

  1. ROE 5 Year Average 03/2012 = 4.94
  2. Debt/Total Cap 5 Year Average 03/2012 = 30
  3. Current Ratio 12/2011 = 1.38
  4. Current Ratio 5 Year Average = 1.46
  5. Quick Ratio = 1.87
  6. Cash Ratio = 1.01
  7. Interest Coverage = 4.40
  8. Retention rate = 32%

Company: Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)

Basic overview

  1. Levered free cash flow = $2.18 billion
  2. Quarterly earnings growth = - 23%
  3. Quarterly revenue growth = - 48%
  4. Beta = 2.29
  5. Operating margins= 40.1%
  6. Profit margins= 19.3%
  7. Operating cash flow = 5.06 billion
  8. Long term debt to equity ratio = 0.35
  9. Cash Flow 5 -year Average = 5.17
  10. 5 year sales growth rate = 14.32%
  11. Operating cash flow = 5.06B
  12. 5 year capital spending rate = 11.8%

Growth

  1. Net Income ($mil) 12/2011 = 4560
  2. Net Income ($mil) 12/2010 = 4336
  3. Net Income ($mil) 12/2009 = 2749
  4. Net Income Reported Quarterly ($mil) = 764
  5. EBITDA ($mil) 12/2011 = 10152
  6. EBITDA ($mil) 12/2010 = 10010
  7. EBITDA ($mil) 12/2009 = 7416
  8. Cash Flow ($/share) 12/2011 = 5.95
  9. Cash Flow ($/share) 12/2010 = 5.77
  10. Cash Flow ($/share) 12/2009 = 4.4
  11. Sales ($mil) 12/2011 = 20880
  12. Sales ($mil) 12/2010 = 18982
  13. Sales ($mil) 12/2009 = 15040
  14. Annual EPS before NRI 12/2007 = 4.94
  15. Annual EPS before NRI 12/2008 = 3.43
  16. Annual EPS before NRI 12/2009 = 2.96
  17. Annual EPS before NRI 12/2010 = 4.64
  18. Annual EPS before NRI 12/2011 = 4.84

Dividend history

  1. Dividend Yield = 3.7
  2. Dividend Yield 5 Year Average = 3.10
  3. Dividend 5 year Growth = 5.07

Dividend sustainability

  1. Payout Ratio = 0.37
  2. Payout Ratio 5 Year Average = 0.11

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 6.9
  2. ROE 5 Year Average = 32.34
  3. Return on Investment = 22
  4. Debt/Total Cap 5 Year Average = 31.21
  5. Current Ratio = 3.5
  6. Current Ratio 5 Year Average = 2.33
  7. Quick Ratio = 2.00
  8. Cash Ratio = 1.71
  9. Interest Coverage = 24.2
  10. Retention rate = 63%

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. However, consider taking some money off the table once the summer is behind us as the markets are likely to put in a multi-month top that should lead to a much stronger correction.

Investors looking for other ideas might find this article to be of interest: Southern Company: Get In At $38.30 Or Earn An Extra 8.8%.

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.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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

Source: 5 Plays Worth Taking A Closer Look At