5 Interesting Plays With Yields As High As 16%

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Includes: KMP, PX, TE, TEF, TWO
by: Tactical Investor

Today, we are going to look at five stocks that offer high yields, but investors should not base their investment decision on yield alone. It would be wise to get a handle on some of the key metrics mentioned below. It is okay to deploy some capital into riskier plays but betting the house is asking for trouble.

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 factor

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.

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.

The payout ratio tells us what portion of the profit is being returned to investors. A pay out ratio over 100% indicates that the company is paying out more money to shareholders, then 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 sometime. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever; if your tolerance for risk is a low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest 5 Magnificent Plays Sporting Great Yields As High As high as 11.10%

Price to cash flow ratio is obtained by dividing the share price by cash flow per share. It is a measure of the market's expectations of a company's future financial health. The effects of depreciation and other non cash factors are removed, and this makes it easier for investors to assess foreign companies in the same industry. This ratio also provides a measure of relative value like the price to earnings' ratio.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of 1 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.

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

Quick ratio or acid -test is obtained by adding cash and cash equivalents plus marketable securities and accounts receivable dividing them by current liabilities. It is a measure of a company's ability to use its quick assets (assets that can be sold of immediately at close to book value) to pay off its current liabilities immediately. A company with a quick ratio of less than 1 cannot pay back its current liabilities. Additional key metrics are addressed in this article 5 Super Stocks With Stellar Dividend Histories

Our favourite play might surprise most as it has the lowest yield on the list but has the best 10 year performance. This clearly illustrates the principle that dividend investors should never base their choice on yield alone. Our play of choice is Praxair, Inc. (NYSE:PX) and we like it for the following reasons:

  1. It has a five year dividend average of 1.9%
  2. It has a five dividend growth rate of 14.2% and a 3 year dividend growth rate of 10.09%
  3. It has consecutively increased dividends for 19 years
  4. It has a total 3 year return of 83%
  5. A very strong quarterly earnings growth rate of 215%
  6. A healthy ROE of 28%
  7. A very good interest coverage ratio of 17.7
  8. Net income has been trending upwards for the past 4 years
  9. A very manageable payout ratio of 37%
  10. It has decent a current ratio of 1.2

Important facts in regards to investing and REITS

  1. 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.

Stock

Dividend Yield (%)

Market Cap

Forward PE

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

TEF

9.80%

77.5B

7.95

21.13B

-16.60%

0.99

80.50B

6.4B

KMP

5.30%

29.6B

33.07

2.61B

4.00%

0.39

8.21B

2.866B

TE

5.00%

3.77B

12.85

946.30M

-3.20%

0.79

3.34B

754.10M

PX

2.1%

32.1B

16.34

3.47B

6.60%

0.85

11.25B

2.46B

TWO

16.2%

1.3B

N/A

106M

530.40%

0.20

131.73M

98.70M

Telefonica, S.A.

Industry : Services

It has a free cash flow rate of $4.2 billion and a current ratio of 0.62

Net income for the past three years

2008 = $11.04 billion

2009 = $11.16 billion

2010 = $13.64 billion

Total cash flow from operating activities

2008 = $23.08 billion

2009 = $23.17 billion

2010 = $22.37 billion

Key Ratios

P/E Ratio = 46.3

P/E High - Last 5 Yrs = 15

P/E Low - Last 5 Yrs = 5.9

Price to Sales = 1.81

Price to Book = 3.26

Price to Tangible Book = -1.72

Price to Cash Flow = 8.80

Price to Free Cash Flow = -48.40

Quick Ratio = 0.6

Current Ratio = 0.6

LT Debt to Equity = 3

Total Debt to Equity = 3.41

Interest Coverage = 2.3

Inventory Turnover = 8.4

Asset Turnover = 0.3

ROE = 15.11%

Return on Assets = 3.15%

Current Ratio = 0.62

Total debt = 80.88B

Book value = 5.26

Qtrly Earnings Growth = N/A

Dividend yield 5 year average = 6.6%

Dividend rate = $ 2.13

Payout ratio = 416%

Dividend growth rate 3 year avg = 28.88%

Dividend growth rate 5 year avg = 21.66%

Consecutive dividend increases = 8 years

Paying dividends since = 1990

Total return last 3 years = 27.16%

Total return last 5 years = 12.92%

Notes

The dividend was cut from $1.082 to $1.059; from a long term perspective the dividend is still in a uptrend. Quarterly revenue growth is also negative.

Kinder Morgan Energy Partners

Industry: Equipment & Services

It has a free cash flow rate of $1.75 billion and a current ratio of 0.46

Net income for the past three years

2008 = $1.31 billion

2009 = $1.27 billion

2010 = $1.32 billion

2011= it stands at $824 million and could top the $1.03 billion mark.

Total cash flow from operating activities

2008 = $2.24 billion

2009 = $2.12 billion

2010 = $2.42 billion

Key Ratios

P/E Ratio = 528.8

P/E High - Last 5 Yrs = N.A.

P/E Low - Last 5 Yrs = N.A.

Price to Sales = 2.51

Price to Book = 2.68

Price to Tangible Book = 3.96

Price to Cash Flow = 20.60

Price to Free Cash Flow = -6.20

Quick Ratio = 0.4

Current Ratio = 0.5

LT Debt to Equity = 1.54

Total Debt to Equity = 1.78

Interest Coverage = 3.3

Inventory Turnover = 134.5

Asset Turnover = 0.4

ROE = 17.03%

Return on Assets = 4.54%

200 day moving average = 74.97

Current Ratio = 0.44

Total debt = 13.88B

Book value = 22.45

Qtrly Earnings Growth = 16.1%

Dividend yield 5 year average = 6.5%

Dividend rate = $ 4.61

Payout ratio = 283%

Dividend growth rate 3 year avg = 4.67%

Dividend growth rate 5 year avg = 7.24%

Consecutive dividend increases = 15 years

Paying dividends since = 1992

Total return last 3 years = 97.4%

Total return last 5 years = 111.13%

Positive developments

Dividend was increased from $1.15 to $1.16 and it has a very stellar history of consecutively increasing its dividends.

TECO Energy Inc.

Industry: Electric Utilities

Levered Free Cash Flow: $33.60M

Net income for the past three years

2008 = $162.4 million

2009 = $213.9 million

2010 = $239 million

2011= it stands at $219 million and could top the $270 million mark.

Total cash flow from operating activities

2008 = $387.8 million

2009 = $724.7 million

2010 = $664.4 million

Key Ratios

P/E Ratio = 14.3

P/E High - Last 5 Yrs = 28.6

P/E Low - Last 5 Yrs = 8.1

Price to Sales = 1.14

Price to Book = 1.68

Price to Tangible Book = 1.73

Price to Cash Flow = 7.00

Price to Free Cash Flow = 82.10

Quick Ratio = 0.5

Current Ratio = 0.8

LT Debt to Equity = 1.19

Total Debt to Equity = 1.36

Interest Coverage = 3

Inventory Turnover = 8.1

Asset Turnover = 0.5

ROE = 12.3%

Return on Assets = 5.35%

Current Ratio = 0.78

Total debt = 3.07B

Book value = 10.6

Qtrly Earnings Growth = -6.2%

Dividend yield 5 year average = 5.1%

Dividend rate = $ 0.86

Payout ratio = 66%

Dividend growth rate 3 year avg = 2.27%

Dividend growth rate 5 year avg = 1.8%

Consecutive dividend increases = 9 years

Paying dividends since = 1900

Total return last 3 years = 72.55%

Total return last 5 years = 32.17%

Notes

It has been paying dividends for a very long time. After taking a hit in 2003 dividends are in an uptrend again. Net income has generally been rising for the past 4 years. It has a manageable payout ratio of 66%.

Praxair, Inc.

Industry: Specialty Chemicals

Levered Free Cash Flow: 583.50M

Net income for the past three years

2008 = $1.22 billion

2009 = $1.26 billion

2010 = $1.2 billion

2011= it stands at $1.2 billion and could top the $1.6 billion mark.

Total cash flow from operating activities

2008 = $2.04 billion

2009 = $2.17 billion

2010 = $1.91 billion

2011= It stands at$1.6 billon and could top the $2.45 billion mark.

Key Ratios

P/E Ratio = 19.8

P/E High - Last 5 Yrs = 26.2

P/E Low - Last 5 Yrs = 12.5

Price to Sales = 2.85

Price to Book = 5.58

Price to Tangible Book = 8.98

Price to Cash Flow = 13.50

Price to Free Cash Flow = -75.60

Quick Ratio = 0.9

Current Ratio = 1.2

LT Debt to Equity = 1.01

Total Debt to Equity = 1.1

Interest Coverage = 17.4

Inventory Turnover = 15

Asset Turnover = 0.7

ROE = 28.32%

Return on Assets = 9.76%

Current Ratio = 1.03

Total debt = 6.56B

Book value = 18.32

Qtrly Earnings Growth = 215.8%

Dividend yield 5 year average = 1.9%

Dividend rate = $ 2.20

Payout ratio = 37%

Dividend growth rate 3 year avg = 10.09%

Dividend growth rate 5 year avg = 14.29%

Consecutive dividend increases = 19 years

Paying dividends since = 1992

Total return last 3 years = 83.11%

Total return last 5 years = 84.52%

Notes

PX is our favorite play on this list.

Two Harbors Investment Corp.

Industry : REITs

Free Cash Flow is $109 million

Net income

2009 = $-8.75 million

2010 = $35.76 million

2011= It stands at $76 million and could top the $130 million mark.

Total cash flow from operating activities

2009 = $-11.37 million

2010 = $33.12 million

2011= It stands at $87 million and could top the $132 million mark.

Key Ratios

P/E Ratio = 6.3

P/E High - Last 5 Yrs = N.A.

P/E Low - Last 5 Yrs = N.A.

Price to Sales = 13.95

Price to Book = 1.36

Price to Tangible Book = 1.36

Price to Cash Flow = 19.50

Price to Free Cash Flow = 49.50

Quick Ratio = 1.1

Current Ratio = 1.1

LT Debt to Equity = 0

Total Debt to Equity = 0

Interest Coverage = 13.3

Inventory Turnover = N.A.

Asset Turnover = 0

ROE = 11.94%

Return on Assets = 1.84%

Current Ratio = 0.32

Total debt = 7.35B

Book value = 9.3

Qtrly Earnings Growth = 452.7%

Dividend yield 5 year average = N/A

Dividend rate = $ 1.60

Payout ratio = 102%

Dividend growth rate 3 year avg = N/A

Dividend growth rate 5 year avg = N/A

Consecutive dividend increases = 2 years

Paying dividends since = 2009

Total return last 3 years = 42.29%

Total return last 5 years = N/A

Notes

It has a very strong quarterly earnings, a strong revenue growth rate, a positive levered free cash flow rate of $109 million, has a strong interest coverage ratio of 13.3 and has raised dividends from day 1 on annual basis.

On the negative side it has a very short dividend history. Another positive is that net income and total cash flow from operating activities have been rising for the past 2 years and are on course to rise for the 3rd year.

Conclusion

Long-term investors need to be patient the markets are extremely overbought and have refused to pull back strongly so far. History clearly indicates that no market no matter how strong it might appear to be can trend in one direction only; sooner or later it has to pull back. There will be a strong pullback the charts are clearly indicating this; the more overbought this market becomes the stronger the ensuing correction will be. This correction will probably serve as a launch pad for an even stronger rally before a multi month top finally takes hold. As such longer-term investors would be wise to wait for a pullback before committing large sums of fresh money to this market.

All dividend history charts sourced from dividata.com and earning estimates and growth rates sourced from dailyfinance.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is very important that you check the finer details, 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