In part III of this series of articles, we examined 7 stocks with yields as high as 18%. As there are many novice investors simply chasing stocks that offer high yields, we decided to include and explain the value of some of the more important metrics. Please remember that this list should not be viewed as a list of stocks to buy, but used as a starting point in one's quest for higher yields.
Novice players should take the time to understand what they are getting into and not just open up a position based on high yields only. It might be okay to take on higher risk with small amounts of capital but throwing a large amount of capital into a stock just because it offers a high yield only could be a recipe for a disaster.
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.
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. Individuals searching for stocks with long stellar histories of consecutively increasing their dividend payments might find this article to be of interest Best Of The Best: Dividend Champions Part VI
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 than 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 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 a low, look for similar companies offering the same or higher yields, but with lower payout ratios.
Stock | Yield | Market cap | Forward PE | EBITDA | Quarterly revenue growth | Beta | Revenue | Cash flow |
NYMT | 13.6% | 80.9M | 7 | ----- | -78.00% | 0.86 | 16M | 6.04M |
NRGY | 11.50% | 2.88B | 23 | 364M | 48.7% | 0.46 | 2.15B | 114M |
CLMT | 10.10% | 1.02B | 9.37 | 136.8M | 30% | 0.37 | 2.71B | 45.8M |
VGR | 8.60% | 1.4B | 18 | 143.1M | 1.90% | 0.38 | 546M | 29.9M |
BWP | 7.6% | 5.47B | 19 | 650M | 4.40 | 0.19 | 1.14B | 455M |
SDRL | 9.8% | 15.7B | 9.9 | 2.32B | -3.7% | 1.72 | 4.3B | 1.76B |
IVR | 18.00% | 1.63B | 4.62 | ----- | 197.6% | 0.81 | 275M | 231M |
Inergy, L.P (NRGY)
NRGY has an enterprise value of $4.74 billion, a quarterly earning's growth rate of 48.7%, a ROE o -0.92%, a total three-year return of 106%, a EPS of 0.15, a five year dividend average of 5.4% and has been paying dividends since 2001. It has a levered free cash flow rate of $586 million.
Net income for the past three years is as follows; in 2008, $57 million, in 2009 it rose to $61.8 million and in 2010, it dropped to $17.1 million. For 2011, net income is negative at -$79 million.
Key ratios
- Price to tangible book 12.60
- Price to cash flow 15.40
- Price to free cash flow -2.80
- 5 year sales growth 7.64%
- Inventory turnover 8.40
- Asset turnover 0.70
- ROE -0.92%
- Return on assets 3.3%
- Total debt $ 1.85B
- 200 day moving average $ 28.44
- Book value $9.62
- Dividend yield 5 year Average 9.9%
- Dividend rate $2.82
- Dividend growth rate 5 year average 5.4%
- Consecutive dividend increases 9 years
- Paying dividends since 2001
- Total return last 3 years 106%
- Total return last 5 years 25%
New York Mortgage Trust Inc (NYMT)
NYMT has an enterprise value of $358 million, a quarterly earnings growth rate of -90%, a ROE of10.37, a total three-year return of 355%, an EPS of 0.82, and a five year dividend average of 19%. Net income for the past three years is as follows; in 2008, it turned negative and came in at -$24 Million, in 2009 it rose to $11 million and in 2010, it dropped again to $6.8 million. For 2011, net income stands at roughly $6 million.
Key ratios:
- Price to tangible book 1.09
- Price to cash flow 10.60
- Price to free cash flow 33.80
- 5 year sales growth -18.56%
- Inventory turnover N/A
- Asset turnover 0.1
- ROE 10.37%
- Return on assets 1.61%
- Total debt $ 363 million
- 200 day moving average $ 7.08
- Book value $6.75
- Dividend yield 5 year Average 19%
- Dividend rate $.90
- Payout ratio 126%
- Dividend growth rate 5 year average -26%
- Consecutive dividend increases 2 years
- Total return last 3 years 355%
- Total return last 5 years -59%
Potential negatives:
The 5 year dividend growth rate average is negative, and the payout ratio is already past 120%. A combination of a negative dividend growth rate and high pay out ratio is generally not a good sign. However, the chart pattern is relatively strong and as long as it does not close below 7 on a weekly basis, it has a decent chance of testing and potentially surpassing its recent high. On the positive side, it has price to book ratio of just 1.09, a positive price to cash flow of 10.60 and surprisingly, a positive price to free cash flow of 33.80.
Vector Group Ltd. (VGR)
VGR has an enterprise value of $1.56 Billion, a quarterly earnings growth rate of 60.9%, a five year EPS growth of 5.28%, a total three-year return of 93%, a EPS of 0.94, cash flow per share of11.18, price/sales of 1.24, and a price/cash flow of 14.90. VGR also has a levered free cash flow rate of 58.19 million. Out of a possible five stars, we would assign VGR 4 stars.
Net income for the past three years is as follows; in 2008, it was $60 Million, in 2009 it dropped to $24.8 million and in 2010, it doubled to $54 million. For 2011, it stands at $66 million.
Key ratios
- Price to tangible book - 7.98
- Price to cash flow 14.90
- Price to free cash flow -11.10
- 5 year sales growth 19.45
- Inventory turnover 8.20
- Asset turnover 1.20
- Return on assets of 9.26%
- Total debt $ 517 million
- 200 day moving average $ 17.85
- Book value -$0.84
- Dividend yield 5 year Average 9.5%
- Dividend rate $1.60
- Payout ratio 163%
- Dividend growth rate 5 year average 5.00%
- Consecutive dividend increases 12 years
- Paying dividends since 1990
- Total return last 3 years 93%
- Total return last 5 years 86%
As long as it does not close below 17.00 on a weekly basis the outlook will remain bullish. A weekly close above 18.50 should lead to a series of new highs.
Calumet Specialty Products Partners LP (CLMT)
CLMT has an enterprise value of $1.65 Billion, a quarterly revenue growth rate of 30%, a ROE of 5.32, a five year dividend growth rate of 13.6%, a total three-year return of 181%, a EPS of 0.64, sales per share of 52.65, a price/cash flow of 10.00 and price/book 1.77. Net income for the past three years is as follows; in 2008, it was $44 Million, in 2009 it rose to $61 million and in 2010, it dropped significantly to $16 million. For 2011, it stands at $16 million. It has a levered free cash flow rate of -$101 million.
Key ratios
- Price to tangible book 2.04
- Price to cash flow 10.00
- Price to free cash flow -1.90
- 5 year sales growth 8.48%
- Inventory turnover 8
- Asset turnover 2.00
- ROE 5.32%
- Return on assets 3.4%
- Total debt $ 644 million
- 200 day moving average $ 19.70
- Book value -$10.35
- Dividend yield 5 year Average 11.7%
- Dividend rate $194
- Payout ratio 251%
- Dividend growth rate 5 year average 13.66%
- Consecutive dividend increases 1 year
- Paying dividends since 2006
- Total return last 3 years 181%
- Total return last 5 years -26%
If it can close above 20 on a weekly basis, it has a real chance of testing its highs. If the volume is strong during a break out past 20, then it could go on to put in a series of new 52-week highs. A weekly close below 18, would signal that a retest of the lows.
Boardwalk Pipeline Partners, LP (BWP)
It has enterprise value of $8.6 billion, a quarterly revenue growth of 4.40%, a ROE of 7.2%, a five-year dividend growth rate of 10.18%, a five- year dividend average of 7.3%, a total return of 86% for the past three years, and has been paying dividends since 2006. It has a levered free cash flow rate of $177 million.
Key ratios
- Price to tangible book 1.78
- Price to cash flow 11.70
- Price to free cash flow -42.90
- 5 year sales growth 14.60
- Inventory turnover 39.40
- Asset turnover 0.20
- ROE 7.2%
- Return on assets 3%
- Total debt 3.2B
- 200 day moving average $26.96
- Book value $16.04
- Dividend yield 5 year Average 7.3%
- Dividend rate $2.19
- Payout ratio 171%
- Dividend growth rate 5 year average 10.18%
- Consecutive dividend increases 4 years
- Paying dividends since 2006
- Total return last 3 years 86.7%
- Total return last 5 years 19%
SeaDrill Limited (SDRL)
It has an enterprise value of $24.26 billion, an incredibly strong 3 year dividend growth rate of 115%, and a quarterly revenue growth rate of -3.7%, a very impressive total rate of return for the last 3 years of 419%, and has been paying dividends since 2008.
Even though the quarterly earning's growth rate (year over year) has turned negative (-90%), if it can continue to secure new contracts, it should have no problem making its dividend payments. Demand for its services continues to increase, and this trend should remain, in effect, as demand for oil is not dropping on a worldwide basis. SDRL is growing at an annual rate of 12%, and it is projected that it will be able to maintain this rate for the next five years. The following information extracted from Seadrill's website clearly illustrates that 2011 was a fruitful year and that management is clearly focussed on improving shareholder value.
- Seadrill generates third quarter 2011 EBITDA*) of US$612 million
- Seadrill reports third quarter 2011 net income of US$58 million and earnings per share of US$0.07
- Seadrill resolves quarterly cash dividend per share of US$0.76
- Seadrill completes the divestment of the jack-up rig West Juno and records a US$23 million gain on sale
- Seadrill secures two three-year contracts for two jack-ups with a revenue potential of US$348 million
- Seadrill secures a four-year contract with a revenue potential of US$787 million for the ultra-deepwater semi-submersible rig West Hercules
- Seadrill acquires a 33.75 percent ownership stake in Asia Offshore Drilling Ltd through a private placement
- Seadrill participates in two private placements in Archer Limited and increases its ownership to 39.9 percent
- Seadrill secures contracts with a total revenue potential of US$1.6 billion for the ultra-deepwater rigs West Capricorn, West Leo and West Aquarius
- Seadrill secures contracts with a total revenue potential of US$115 million for the jack-up rigs West Ariel, West Callisto and West Prospero
- Seadrill raises US$950 million in debt through two new secured credit facilities
- ROE 31.43%
- Return on assets 6.3%
- Total debt $13.79B
- 200 day moving average $32.54
- Book value $8.76
- Dividend yield 5 year Average N/A
- Dividend rate $2.89
- Dividend growth rate 3 year average 115%
- Consecutive dividend increases 1 years
- Paying dividends since 2008
- Total return last 3 years 419%
SDRL is a rather volatile stock, it has a beat of 1.72, and traders can use this volatility to their advantage. One way to earn extra money would be to sell covered calls on this stock; with such a high beta, you should be able to lock in high premiums. Another option would be to sell naked puts on the stock; this strategy should only be employed if you are bullish on the stock and do not mind owning the stock at a lower price.
Invesco Mortgage Capital Inc (IVR)
Invesco Mortgage Capital an enterprise value of $14.1 billion, a quarterly earnings growth rate of 209%, a quarterly revenue growth rate of 197%, an EPS of $3.83, a ROE of 20.25%, a cash flow of $2.13 per share and has been paying dividends since 2009. Net income for the past two years is as follows; in 2009, it was $15 million and in 2010, it soared to $98 million. For 2011, net income so far stands at $206 million. Insiders have purchased roughly 40,000 shares in the past four months at $14.80-$19.40 a share. The full list of insider transactions can be accessed here. Potential negatives
Key ratios
- Price to tangible book 0.90
- Price/book 0.90
- Price /sales 4.44
- Price to cash flow 7.00
- Price to free cash flow 57.50
- 5 year sales growth N/A
- Inventory turnover N/A
- Asset turnover 0.00
- ROE 20.25%
- Return on assets 2.82%
- Quarterly earnings growth (year over year) 209%
- Total debt $12.57 billion
- 200 day moving average $17.40
- Book value $16.45
- Dividend yield 5 year Average N/A
- Payout ratio 97%
- Dividend rate $3.74
- Dividend growth rate 3 year average N/A
- Consecutive dividend increases 0 years
- Paying dividends since 2009
- Total return last 3 years N/A
- Total return last 5 years N/A
A potential negative is that Invesco Mortgage Capital Inc owns quite a bit of Non agency paper. As mortgage delinquencies are rising, this could be a problem going forward. IVR is attempting to put in a bottom, but a weekly close below 14 will most likely push it to test its lows. A weekly close above $16 would be bullish for the stock.
Conclusion
Our favourite pick is SDRL; it has 3 year dividend growth rate of 115%, a strong ROE of 31%, a price/cash flow of 7.50, earnings of $3.06 per share and an annual growth rate of 12%. SDRL also continues to land new contracts.
Seadrill Ltd announced it secured a contract for semi-tender newbuild with potential revenues of ~$127 mln plus mobilization fee 33.61: Co has been issued a letter of award by Hess Equatorial Guinea to enter into an eight well drilling contract offshore Equatorial Guinea for the semi-tender rig West Esperanza. The anticipated contract duration is a minimum of 18 months, with corresponding potential revenues of ~$127 mln plus mobilization fee. Construction is scheduled for completion in early second quarter of 2013. Following mobilization from Singapore to Equatorial Guinea, the rig is scheduled to commence operation at the end of the second quarter of 2013.
Another benefit of investing in SDRL is that it has a high beta, which makes it a great stock to sell covered calls on. This provides investors with two potential streams of income; one from the dividends earned, and one from the premiums collected from selling the calls.
The markets are putting in a choppy pattern, which suggests that the ride is going to be very volatile. The markets are expected to pull back over the next few days, put in a bottom and then mount a rally. The SPX is expected to test the 1300-1320 ranges, and the Dow could trade as high as 12,800. However, the charts are indicating/suggesting that some negative news is going to hit the markets next year (early January), and this could be the trigger for the next decline, which could take out the Nov lows. Going forward traders should proceed with caution.
All charts were 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.
Disclaimer: 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 in each of the mentioned plays before investing any capital in them. Some investors are happy with taking enormous amounts of risks, while others are bothered by the slightest degree risk; 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.
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