Are you a dividend investor searching out companies that pay their fair share in dividend income? Do you prefer high yields, like over 5%, matched with sustainable payout ratios? If so, we ran a screen keeping this idea in mind. The companies we focused on today not only have those traits, but also have substantial profitability as well as cash liquidity. We think you'll like the list of basic materials companies that we came up with.
Return on Equity [ROE] is one way to identify great potential names relative to profitability. This ratio illustrates the percentage return on shareholder equity. As well, this metric segments the company into operational efficiency, asset use efficiency, and financial leverage. Why does this matter? Simply put, it allows investors to get a real picture of how the company is generating these returns and helps identify parts of the company that may be underperforming.
The Operating Profit Margin is a profitability ratio that measures the effectiveness of the company's operating efficiency. This metric allows investors to see how much profit is left after all variable costs are covered. If the company's margin is increasing over time this means that it's earning more per dollar of sales. Finding trends in the Operating Profit Margin helps investors identify companies that are improving profitability over time and managing the economic landscape better than competitors.
The Current ratio is a liquidity ratio used to determine a company's financial health. The metric illustrates how easily a firm can pay back its short obligations all at once through current assets. A company that has a current ratio of one or less is generally a liquidity red flag. Now this doesn't mean the company will go bankrupt tomorrow, but it also doesn't bode well for the company, and may indicate that it could have an issue paying back upcoming obligations.
The Quick ratio measures a company's ability to use its cash or assets to extinguish its current liabilities immediately. Quick assets include assets that presumably can be converted to cash at close to their book values. A company with a Quick Ratio of less than 1 cannot currently pay back its current liabilities. The quick ratio is more conservative than the Current Ratio because it excludes inventory from current assets, since some companies have difficulty turning their inventory into cash. If short-term obligations need to be paid off immediately, sometimes the current ratio would overestimate a company's short-term financial strength. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
We first looked for stocks that have a high dividend yield (Div. Yield > 5%). We then screened for businesses that have been able to maintain a sound level of profitability for shareholders (ROE [TTM]>30%)(1-year operating margin>15%). Next, we then screened for businesses that have a substantial amount of cash on hand (Current Ratio>2)(Quick Ratio>2). We did not screen out any market caps or sectors.
Do you think these stocks have a strong outlook? Use our list along with your own analysis.
1) Terra Nitrogen Company, L.P. (NYSE:TNH)
Terra Nitrogen Company, L.P. has a Dividend Yield of 8.12% and Payout Ratio of 197.35% and Return on Equity of 121.29% and Operating Profit Margin of 63.92% and Current Ratio of 4.63 and Quick Ratio of 4.18. The short interest was 5.69% as of 06/01/2012. Terra Nitrogen Company, L.P. engages in the production and sale of nitrogen fertilizer products. It primarily offers anhydrous ammonia and urea ammonium nitrate solutions. Terra Nitrogen GP Inc.
2) CVR Partners, LP (NYSE:UAN)
CVR Partners, LP has a Dividend Yield of 10.26% and Payout Ratio of 78.40% and Return on Equity of 60.52% and Operating Profit Margin of 46.59% and Current Ratio of 4.95 and Quick Ratio of 4.52. The short interest was 5.65% as of 06/01/2012. CVR Partners, LP engages in the production, distribution, and marketing of nitrogen fertilizers in North America. Its nitrogen fertilizer products include ammonia and urea ammonium nitrate. The company was founded in 2007 and is based in Sugar Land, Texas.
3) Southern Copper Corp. (NYSE:SCCO)
Southern Copper Corp. has a Dividend Yield of 7.11% and Payout Ratio of 82.37% and Return on Equity of 58.93% and Operating Profit Margin of 54.64% and Current Ratio of 3.56 and Quick Ratio of 2.92. The short interest was 5.29% as of 06/01/2012. Southern Copper Corporation engages in mining, exploring, producing, smelting, and refining copper and other minerals in Peru, Mexico, and Chile. It is involved in the mining, milling, and flotation of copper ore to produce copper and molybdenum concentrates; smelting of copper concentrates to produce anode copper; and refining of anode copper to produce copper cathodes, as well as refined silver. The company operates Toquepala and Cuajone mines in the Andes Mountains located to the southeast of the city of Lima, Peru, as well as a smelter and refinery in the coastal city of Ilo, Peru. It also operates La Caridad and Buenavista copper mines, and smelting and refining plants in Mexico.
*Company profiles were sourced from Finviz. Financial data was sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.