5 Interesting Candidates With Good Growth Potential

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Includes: KMP, LVLT, SDRL, TOT, VOD
by: Tactical Investor

He who asks a question is a fool for five minutes; he who does not ask a question remains a fool forever.

Chinese Proverb

Investing in dividend paying stocks makes sense for the following reasons:

  • A steady income without having to sell your position.
  • Provides you with more financial flexibility.
  • It's a good hedge against inflation.
  • Cash flow regardless of market direction.
  • Quicker compounding.
  • Provides one with the two potential sources of income; one from capital gains and the other from the dividends paid out.
  • One can also open up additional streams of income by selling covered calls.
  • If one is bullish on the stock one can open up an additional stream of income by selling puts.

Investors should take the time to understand the following key ratios as many of them have been used in this article. Getting a handle on these ratios could mean the difference between spotting a winner or a dud.

Enterprise value - is a combination of the market cap, debt, minority interests, preferred shares less total cash and cash equivalents. This provides a better picture because it is a more accurate representation of a company's value contrary to simply looking at the market cap.

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.

Cash ratio - this is the ratio of the company's total cash and cash equivalents to its current liabilities; this ratio is used 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.

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 Growth Plays: 4 Great And 1 Mediocre

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 sales ratio - is calculated by dividing the company's share price by its revenue per share. Generally, the smaller the ratio (less than 1.0) the better the investment since the investor is paying less for each unit of sales. However, there are exceptions as a company with a low price to sales ratio could be unprofitable. It is sometimes

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

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. 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.

Inventory turnover - is calculated by dividing sales by inventory. If a company generated $30 million in sales and had an average inventory of $6 million; the inventory turn over would be equal to 5. This value indicates that there are 5 inventory turnovers per year. This means that it takes roughly 2.4 months to sell the inventory. A low inventory turnover is a sign of inefficiency 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. Additional key metrics are addressed in this article 5 Dividend Champs With Great Growth Potential.

Kinder Morgan Energy Partners (NYSE:KMP) is our favorite play on this list for the following reasons:

  • A very good free cash flow of $1.6 billion.
  • Net income has been trending upwards for the past few years.
  • Cash flow per share has increased from $10.54 in 2009 to $11.72 in 2011.
  • It has a yield of 5.60, which is almost double that of the official inflation rate.
  • A decent five-year dividend growth rate of 7.31%.
  • While it sports a weak current and quick ratio, the interest rate coverage ratio of 5.26 makes up for this shortfall to some degree.
  • Cash flow from operating activities has increased from $2.1 billion in 2009 to $2.8 billion in 2011.
  • Gross profit has increased from $2.7 billion in 2009 to $3.2 billion in 2011.
  • A decent quarterly earnings growth rate of 16%.
  • An inventory turnover rate of 154.
  • It has consecutively increased dividends for 15 years.
  • An impressive three year total return of 110%.
  • A good free cash flow yield of 7.8%.
  • 100K invested for 10 years would have grown to 315K. Dividends were not reinvested if they were the rate of return would have been greater.

Company: Kinder Morgan Energy

Free Cash Flow = $1.67 billion

Basic Key ratios

Percentage Held by Insiders = 20.72

Market Cap ($mil) = 20804

Growth

Net Income ($mil) 12/2011 = 1268

Net Income ($mil) 12/2010 = 1316

Net Income ($mil) 12/2009 = 1268

EBITDA ($mil) 12/2011 = N/A

EBITDA ($mil) 12/2010 = 2780

EBITDA ($mil) 12/2009 = 2628

Cash Flow ($/share) 12/2011 = 11.72

Cash Flow ($/share) 12/2010 = 10.34

Cash Flow ($/share) 12/2009 = 10.54

Sales ($mil) 12/2011 = 8211

Sales ($mil) 12/2010 = 8078

Sales ($mil) 12/2009 = 7003

Dividend history

Div Yield = 5.60

Div Yield 5 Yr Average 12/2011 = 6.8

Annual Dividend 12/2011 = 4.58

Forward Yield = 5.15

Div 5yr Growth 12/2011 = 7.31

Dividend sustainability

Payout Ratio 09/2011 = 2.81

Payout Ratio 5 Yr Average 12/2011 = 2.62

Change in Payout Ratio = 0.07

Performance

5 Yr Historical EPS Growth 12/2011 = -3.7

ROE 5 Yr Average 12/2011 = 22.23

Return on Investment 12/2011 = 9.37

Debt/Tot Cap 5 Yr Average 12/2011 = 60.61

Current Ratio 12/2011 = 0.44

Current Ratio 5 Yr Average = 0.54

Quick Ratio = 0.41

Cash Ratio = 0.15

Interest Coverage 12/2011 = 5.26

Valuation

Book Value Qtr ($/sh) 12/2011 = 32.93

Book Value Qtr ($/sh) 09/2011 = 33.69

Book Value Qtr ($/sh) 06/2011 = 33.76

Anl EPS before NRI 12/2007 = 1.74

Anl EPS before NRI 12/2008 = 2.07

Anl EPS before NRI 12/2009 = 1.31

Anl EPS before NRI 12/2010 = 1.47

Anl EPS before NRI 12/2011 = 1.75

Price/ Book = 2.74

Price/ Cash Flow = 7.69

Price/ Sales = 2.53

EV/EBITDA 12 Mo = 11.17

P/E/G F1 = 7.57

Company: Total Fina Sa (NYSE:TOT)

Levered Free Cash Flow = 5.20B

Basic Key ratios

Percentage Held by Insiders = N/A

Market Cap ($mil) = 130597

Number of Institutional Sellers 12 Weeks = N/A

3 Month % Chg Short Interest = n/a

Growth

Net Income ($mil) 12/2011 = 17523

Net Income ($mil) 12/2010 = 14351

Net Income ($mil) 12/2009 = 12034

EBITDA ($mil) 12/2011 = 50134

EBITDA ($mil) 12/2010 = 40482

EBITDA ($mil) 12/2009 = 33494

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

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

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

Div 5yr Growth 12/2011 = 7.52

Sales ($mil) 12/2011 = 245420

Sales ($mil) 12/2010 = 217573

Sales ($mil) 12/2009 = 183201

Dividend history

Div Yield = 4.77

Div Yield 5 Yr Average = 5.60

Annual Dividend 12/2011 = 2.64

Annual Dividend 12/2010 = 2.48

Forward Yield = 4.77

Div 5yr Growth 12/2011 = 9.00%

Dividend sustainability

Payout Ratio 09/2011 = 0.47

Payout Ratio 06/2011 = 0.39

Payout Ratio 5 Yr Avg 12/2011 = 0.43

Payout Ratio 5 Yr Avg 09/2011 = 0.42

Payout Ratio 5 Yr Avg 06/2011 = 0.4

Change in Payout Ratio = -0.06

Performance

5 Yr Historical EPS Growth 12/2011 = -5.66

ROE 5 Yr Avg 12/2011 = 23.71

Return on Investment 12/2011 = 13.24

Debt/Tot Cap 5 Yr Avg 12/2011 = 26.15

Current Ratio 12/2011 = 1.36

Current Ratio 09/2011 = 1.4

Current Ratio 06/2011 = 1.25

Curr Ratio 5 Yr Avg = 1.39

Quick Ratio = 0.98

Cash Ratio = 0.55

Interest Coverage 12/2011 = 36.83

Valuation

Book Value Qtr ($/share) 12/2011 = 40.89

Anl EPS before NRI 12/2007 = 7.95

Anl EPS before NRI 12/2008 = 9.12

Anl EPS before NRI 12/2009 = 4.85

Anl EPS before NRI 12/2010 = 6.26

Anl EPS before NRI 12/2011 = 6.72

Price/ Book = 1.35

Price/ Cash Flow = 4.8

Price/ Sales = 0.5

EV/EBITDA 12 Mo = 2.84

P/E/G F1 = 2.53

Level 3 Communications, Inc. (NASDAQ:LVLT)

Industry: Services

Levered Free Cash Flow: 442.00M

Net income for the past three years

Net Income 2009 = $-618 million

Net Income 2010 = $-622 million

Net Income 2011 = $-756 million

EBITDA 12/2011 = $791 million

EBITDA 12/2010 = $801 million

EBITDA 12/2009 = $934 million

Net income Reported Quarterly = $109 million

Total cash flow from operating activities

2009 = $346 million

2010 = $339 million

2011 = $388 million

Cash Flow 12/2011 = $1.02 per share

Cash Flow 12/2010 = $2.4 per share

Cash Flow 12/2009 = $3.12 per share

Annual EPS before NRI 12/2011 = -4.73

Annual EPS before NRI 12/2010 = -6

Annual EPS before NRI 12/2009 = -5.7

Annual EPS before NRI 12/2008 = -3.75

Annual EPS before NRI 12/2007 = -6.75

Return on Assets = -6.48%

Key Ratios

Price to Sales = 1.14

Price to Book = 4.18

Price to Tangible Book = -2.93

Price to Cash Flow = 23.5

Price to Free Cash Flow = -45.5

Current Ratio 09/2011 = 1.03

Current Ratio 5 Year Average = 1.21

Quick Ratio = 1.03

Cash Ratio = 0.64

Total return last 3 years = 158.28%

Total return last 5 years = -74%

Vodafone Group Plc (NASDAQ:VOD)

Industry: Services

Levered Free Cash Flow: -4.32B

Net income for the past three years

Net Income 2009 = $5304 million

Net Income 2010 = $13754 million

Net Income 2011 = $12246 million

EBITDA 12/2011 = $14779 million

EBITDA 12/2010 = $13844 million

EBITDA 12/2009 = $7213 million

Net income Reported Quarterly = $109 million

Total cash flow from operating activities

2009 = $17.51 billion

2010 = $19.82 billion

2011 = $19.23 billion

Cash Flow 12/2011 = 2.59 $/share

Cash Flow 12/2010 = 3.03 $/share

Cash Flow 12/2009 = 2.53 $/share

Annual EPS before NRI 12/2011 = 2.54

Annual EPS before NRI 12/2010 = 3.01

Annual EPS before NRI 12/2009 = 2.6

Annual EPS before NRI 12/2008 = 2.5

Annual EPS before NRI 12/2007 = 2.31

Quarterly Earnings Growth = -11.4%

Quarterly Revenue Growth = 4.1%

Key Ratios

Price to Book = 1

Price to Tangible Book = 4.42

Price to Cash Flow = 10.43

Price to Free Cash Flow = 216.9

Current Ratio 5 Year Average = 0.53

Quick Ratio = 0.61

Cash Ratio = 0.27

Interest Coverage 03/2012 = N/A

Dividend yield 5 year average = 6.2%

Dividend growth rate 3 year avg = 18.31%

Dividend growth rate 5 year avg = 50%

Consecutive dividend increases = 2 years

Paying dividends since = 2006

Total return last 3 years = 93.47%

Total return last 5 years = 30.28%

Seadrill Ltd (NYSE:SDRL)

Industry: Production and Extraction

Levered Free Cash Flow: -1.01B

Net income for the past three years

Net Income ($mil) 2009 = $1261

Net Income ($mil) 2010 = $1172

Net Income ($mil) 2011 = $1506

Key Ratios

Price to Tangible Book = 3.52

Price to Cash Flow = 9.17

Price to Free Cash Flow = -7.7

Quick Ratio = 0.73

Current Ratio = 0.80

LT Debt to Equity = 1.37

Total Debt to Equity = 1.36

Interest Coverage = N/A

Inventory Turnover = N/A

Asset Turnover = 0.23

ROE = 20.29%

Return on Assets = 7.42%

Payout ratio = 79%

Dividend growth rate 3 year average = 162.31%

Dividend growth rate 5 year average = N/A%

Consecutive dividend increases = 2 years

Paying dividends since = 2010

Total return last 3 years = 504%

Total return last 5 years = 211%

Notes

Net income has increased nicely for the past few years, and it sports a very good three-year dividend growth rate of 162%. Day rates are expected to trade north of $600,000 per day and this should prove to be very lucrative for SDRL. Currently it operates 44 rigs and has ordered several more ultra deep water rigs due to the booming market. Chief financial officer Esa Ikaheimonen said that he was bullish on rates and that the market was seeing almost everything up to $750,000 dollars plus a day. It sports a high beta so it's a good stock to sell covered calls on.

Conclusion

The markets are extremely overbought right now. Long-term investors would do well to wait for a nice decent pullback before deploying new sums of money into this market. If you are bullish on certain stocks, then you can sell naked put options with strike prices where you would not mind owning the stock. For example, if you like stock XYZ at 25, and it is now trading at 32, then you can sell naked puts with a strike of 25.

EPS, EPS surprise, broker recommendations and price and consensus charts sourced from zacks.com. Earnings estimates and growth rate charts sourced from dailyfinance.com. Free cash flow yield, income from cont operations, and revenue growth sourced from Ycharts.com. Dividend history sourced from dividata.com.

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

Additional disclosure: 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.