My High Dividend Stocks Blog

My High Dividend Stocks
This is my high dividend stocks site where I help site members find high dividend stocks with earning power and strong balance sheets.

The practical significance of book value. Plus 15 book values of stocks mention on this blog.

There is no hard fast rule for price to book value ratios, but lower is definitely better.  I like the ratio too be less than 2.0.  Here is a list of many of the high dividend stocks mentioned on this blog with their most recent price, book value (BV)/share, Price/BV ratio, and dividend yield.  The results might surprise you.  Most of the book values per share are as of December 21st, 2010 unless otherwise noted.

Ticker              Price                BV/share         P/BV   Div. yield

=================================================

AGNC            $28.58             $24.24             1.18     19.51%

SB                   $8.26               $3.86               2.14     6.79%

SDRL              $34.42             $9.78               3.52     5.6%

TNH                $108.96           $11.35             9.6       4.94%

EXC                $39.97             $20.45             1.95     5.13%

FE                   $37.90             $28.02             1.35     5.99%

FRO                $22.59             $9.57               2.36     1.62%

MCD               $76.66             $13.55             5.66     3.27%

NGG               $48.80             $12.87 (ttm)    3.79     4.28%

PM                  $65.90             $1.90               34.68   4.01%

PCL                 $42.13             $8.47               4.97     3.96%

TNK                $10.15             $10.46             0.97     9.02%

VOD               $28.85             $17.06 (ttm)    1.69     3.18%

WIN                $12.41             $1.77               7.01     7.73%

T                      $30.27             $18.80             1.61     6.11%

Excelon (EXC), First Energy (FE), Teekay Tankers (TNK), and AT&T (T) warrant further examination for their high dividend yields and low price/book value ratios.

Philip Morris (PM) has an extremely high price/book value ratio which needs to be examined to make sure it’s not some weird artifact of how Google Finance and Morningstar display financial information.

Here is quick excerpt for Chapter 42 of Security Analysis 2nd edition on the practical significance of book value.

* * * * * * *

Practical Significance of Book Value. The book value of a common stock was originally the most important element in its financial exhibit. It was supposed to show “the value” of the shares in the same way as a merchant’s balance sheet shows him the value of his business. This idea has almost completely disappeared from the financial horizon. The value of a company’s assets as carried in its balance sheet has lost practically all its significance. This change arose from the fact, first, that the value of the fixed assets, as stated, frequently bore no relationship to the actual cost and, secondly, that in an even larger proportion of cases these values bore no relationship to the figure at which they would be sold or the figure which would be justified by the earnings. The practice of inflating the book value of the fixed property is giving way to the opposite artifice of cutting it down to nothing in order to avoid depreciation charges, but both have the same consequence of depriving the book-value figures of any real significance. It is a bit strange, like a quaint survival from the past, that the leading statistical services still maintain the old procedure of calculating the book value per share of common stock from many, perhaps most, balance sheets that they publish.

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A tale of two book values (AGNC and SB).

I have been concentrating on analyzing dividend records and determining the earning power of various high dividend stocks since August 2010.  But there is another major component of high dividend stock analysis: balance sheet analysis.  Today I will start a series of blog posts covering balance sheet analysis.  I will focus my efforts mostly upon American Capital Agency Corp (AGNC) and Safe Bulkers (SB).

Today I will start examining the book values of AGNC and SB.  It takes some digging in the annual reports to get accurate numbers.

AGNC book value as of December 31st, 2010 is $24.24 per share:

            Tangible assets: $14,476 M (mostly agency securities)

            Intangible assets: none

            Preferred stock: none

            Bonds: none

Minus  Total liabilities: $12,904 M (mostly repurchase agreements)

Equals shareholder equity: $1,572 M

Book value = equity / number of shares = $1,572 M / 64.856 M = a book value of $24.24 per share.

The question for AGNC becomes – How were the prices of the agency securities determined?  Mortgage backed securities are not exactly known for their price transparency.  They are somewhat toxic.  That is why the big banks off loaded them to the Federal Reserve during the financial panic of 2008-2009 and received US treasury bonds in return.  The guarantees from Fannie and Freddie will be revoked in the future due to massive US budget deficits.  I don’t trust the stability of the agency securities prices for three reasons and I will use their own words from their risk factors against them:

1) a continued depression in the housing/mortgage market hurts the value of AGNC’s agency securities.

Continued adverse developments in the broader residential mortgage market may adversely affect the value of the agency securities in which we invest.

Since 2008, the residential mortgage market in the United States has experienced a variety of unprecedented difficulties and changed economic conditions, including defaults, credit losses and liquidity concerns. Many of these conditions are expected to continue in 2011 and beyond. Certain commercial banks, investment banks and insurance companies announced extensive losses from exposure to the residential mortgage market. These losses reduced financial industry capital, leading to reduced liquidity for some institutions. These factors have impacted investor perception of the risk associated with real estate related assets, including agency securities and other high-quality residential mortgage-backed securities (“RMBS”) assets. As a result, values for RMBS assets, including some agency securities and other AAA-rated RMBS assets, have experienced a certain amount of volatility. Further increased volatility and deterioration in the broader residential mortgage and RMBS markets may adversely affect the performance and market value of our agency securities.

We invest exclusively in agency securities (other than for hedging purposes) and rely on our agency securities as collateral for our financings. Any decline in their value, or perceived market uncertainty about their value, would likely make it difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements already in place. Substantially all of the agency securities we invest in are classified for accounting purposes as available-for-sale. All assets classified as available-for-sale are reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity. Agency securities that we invest in that are classified as trading securities are reported at fair value, with unrealized gains and losses included in current income. As a result, a decline in fair values may reduce the book value of our assets. Moreover, if the decline in fair value of an available-for-sale security is other-than-temporarily impaired, such decline will reduce earnings. If market conditions result in a decline in the fair value of our agency securities, our financial position and results of operations could be adversely affected.

2) If the Federal Reserve sells enough agency securities, then that will hurt the value of AGNC’s securities (not likely anytime soon)

Federal Reserve programs to purchase securities could have an adverse impact on the agency securities in which we invest.

Beginning in November 2008, the Federal Reserve initiated a program to purchase direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Bank and agency securities backed by Fannie Mae, Freddie Mac and Ginnie Mae. In total, this program resulted in the Federal Reserve purchasing $300 billion of direct obligations and $1.75 trillion of agency securities with the purchase program ending in the first quarter of 2010. One of the effects of this program has been to increase competition for available direct obligations and agency securities, with the result being an increase in pricing of such securities. The Federal Reserve may hold the direct obligations and agency mortgage securities to maturity or may sell them on the open market. Sales by the Federal Reserve of the direct obligations or agency mortgage securities that it currently holds may reduce the market price of such securities. Reductions in the market price of agency mortgage securities may negatively impact our book value.

In addition, the Federal Reserve initiated a program in November 2010 to purchase up to $600 billion of long-term U.S. Treasury securities by mid-2011 as part of its continuing effort to help stimulate the economy by reducing mortgage and interest rates. Such action could negatively affect our income or our net book value by impacting interest rate levels and the spread between mortgage rates and other interest rates. Thus, these actions could reduce the yields on assets that we are targeting for purchase, thereby reducing our net interest spreads. Alternatively, the Federal Reserve’s actions may not have the intended impact and could create inflation and higher interest rates. This could negatively impact our net book value or our funding cost.

3) Interest rates rise (this is likely as soon as the end of QE 2)

Because we invest in fixed-rate securities, an increase in interest rates on our borrowings may adversely affect our book value or our net interest income.

Increases in interest rates may negatively affect the market value of our agency securities. Any fixed-rate securities we invest in generally will be more negatively affected by these increases than adjustable-rate securities. In accordance with GAAP, we are required to reduce our stockholders’ equity, or book value, by the amount of any decrease in the fair value of our agency securities that are classified as available-for-sale.

Reductions in stockholders’ equity could decrease the amounts we may borrow to purchase additional agency securities, which may restrict our ability to increase our net income. Furthermore, if our funding costs are rising while our interest income is fixed, our net interest income will contract and could become negative.

Safe Bulkers (SB) book value as of December 31st, 2010 is $3.71 per share:

Tangible assets: $805.372 M (mostly 16 dry bulk ships)

Intangible assets: none

Preferred stock: none

Bonds: none

Minus  Total liabilities: $561.239 M (mostly loans for ship purchases)

Equals shareholder equity: $244.133 M

Book value = equity / number of shares = $244.133 M / 65.88 M = a book value of $3.71 per share.  I don’t see any risk factors in Safe Bulkers annual report that could affect their book value.  The prices of ships are easy to determine and their prices are very visible to those who interact with ship brokers.

* * * * * * *

Chapter 42

BALANCE-SHEET ANALYSIS.

SIGNIFICANCE OF BOOK VALUE

ON NUMEROUS OCCASIONS prior to this point we have expressed our conviction that the balance sheet deserves more attention than Wall Street has been willing to accord it for many years past. By way of introduction to this section of our work, let us list five types of information and guidance that the investor may derive from a study of the balance sheet:

1. It shows how much capital is invested in the business.

2. It reveals the ease or stringency of the company’s financial condition, i.e.,

the working-capital position.

3. It contains the details of the capitalization structure.

4. It provides an important check upon the validity of the reported earnings.

5. It supplies the basis for analyzing the sources of income.

In dealing with the first of these functions of the balance sheet, we shall begin by presenting certain definitions. The book value of a stock is the value of the assets applicable thereto as shown in the balance sheet.  It is customary to restrict this value to the tangible assets, i.e., to eliminate from the calculation such items as good-will, trade names, patents, franchises, leaseholds. The book value is also referred to as the “asset value,” and sometimes as the “tangible-asset value,” to make clear that intangibles are not included. In the case of common stocks, it is also frequently termed the “equity.”

Computation of Book Value. The book value per share of a common stock is found by adding up all the tangible assets, subtracting all liabilities and stock issues ahead of the common and then dividing by the number of shares.

In many cases the following formula will be found to furnish a short cut to the answer:

= (Common Stock + Surplus Items – Intangibles) / Number of shares outstanding

By Surplus Items are meant not only items clearly marked as surplus but also premiums on capital stock and such reserves as are really part of the surplus. This would include, for example, reserves for preferred-stock retirement, for plant improvement, and for contingencies (unless known to be actually needed). Reserves of this character may be termed “Voluntary Reserves.”

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Is AGNC really a low P/E stock?

The current price/earnings ratio of AGNC is highly deceptive:

Morningstar reports a forward P/E of 6.1.

Google Finance reports a P/E of 3.69.

Yahoo! Finance reports a P/E (ttm) of 3.53.

These are all low numbers.  Single digit P/E ratios usually indicate possible value investments.  But let’s take a closer look at AGNC’s earnings.  Let’s adjust them for the amazing increase in the number of shares issued and used to leverage up the purchase more agency securities in the government subsidized mortgage market.

American Capital Agency Corp. (AGNC)

Shares: 124.63 M (only 36 M at end of 2010)

Market price: $27.83

Dividend yield: 20.1%

Quarterly dividend: $1.40

(EPS adjusted for drastic changes in capitalization)

                        Net inc.

            EPS     Avail.              Adj. EPS

2006

2007

2008    $2.36   $35 M              $0.28

2009    $6.78   $119 M            $0.95

2010    $7.89   $228 M            $2.31

Three year average earnings equals $1.18 per share.  Value investments typically start below 12 times average earnings.  In AGNC’s case 12 times average earnings equals $14.16 per share.  20 time average earnings equals $23.60 per share.  AGNC is currently selling for 23.6 times average earnings.  This is above 20 which makes a purchase of AGNC above $23.60 a speculative purchase.

Suddenly those low current P/Es don’t seem to hold up anymore when you calculate AGNC’s average earning power over the past three years.

I have warning in other articles that AGNC is will not be able to pay its hefty $1.40 dividend with so many new shares being issued.   If it uses the proceeds of the public offering to pay the current quarter’s dividend, then it is just bidding time before it disappoints shareholders with a larger dividend cut in the future when net income decreases due to a narrowing of the interest rate spread.  That’s how they make their money.

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Is Safe Bulkers still a high dividend stock buy after the public offering of 5 million new shares?

Safe Bulkers (SB) announced yesterday that they are offering 5 million shares for sale to the public for ship purchases and repayment of debt.  The total offer could increase the number of total shares from 65.88 million to 71.63 million (5 m for the offer and 750k for the underwriters).  This is a 8.7% increase in the number of shares.

Prior to the public offering announcement Safe Bulkers was trading for around $9.26.  After the announcement the price dropped to $8.32 this morning (-10.15%).  The company is making the offering at a price of $8.40.  This will bring in an additional $42 million to the company’s coffers.

Is Safe Bulkers still an excellent high dividend stock to buy?  Yes, its high dividend is still safe, it has a 5 year average earning power of $1.50 per share, and its balance sheet is strong.

The company has been paying a quarterly dividend of $0.15 per share.  A $0.60 annual dividend is easily affordable.  SB’s current dividend yield is 7.2% ($0.60/$8.32).  The company’s 5 year average earnings were $1.50 (this excludes gains from ship sales and includes the new shares being offered).  Its dividend payout ratio is less than 50%.  No problem.

I’d like to examine Safe Bulkers earning power adjusted for these new shares and also excluding the gains from ship sales in 2006, 2007, and 2010.  These numbers can be found or calculated from the company’s latest annual report for 2010.

                        Net inc. avail

            EPS     (- ship sales)    Adj. EPS

2006    $1.78   $60.209 M       $0.84

2007    $3.84   $96.840 M       $1.35

2008    $2.19   $119.211 M     $1.66

2009    $3.03   $165.41 M       $2.31

2010    $1.73   $94.448 M       $1.32

Safe Bulkers has an adjusted 5 year average EPS of $1.50 (excluding gains from ship sales and including the new offering of shares).  I exclude ship sales because they are not a reoccurring source of revenue.

SB is trading at 5.5 times the 5 year average earnings.  That is still an extreme value.  I look to buy common stocks with high dividends and a market price well below 12 times average earnings.  If SB were valued like many other stocks at 12 times average earnings, then it would sell for $18.00.  It would sell for $30.00 if it were valued at 20 times average earnings, but that where the stock would become a speculative buy.

The public offering does not damage Safe Bulkers balance sheet which was strong before.

I have recommended in the past that Safe Bulkers was a buy below $8.00.  Any significant market correction would take it down below $8.00.  I believe that it is a buy all the way up to $10.00 at its current dividend rate.  The yield would be 6% at $10.00.  But I think you can get it for under $8.00 if you are patient.

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Here is the press release:

Image001

 

Apr 12, 2011 09:00 ET

Safe Bulkers, Inc. Announces Pricing of Its Public Offering of Common Stock

ATHENS, GREECE--(Marketwire - April 12, 2011) - Safe Bulkers, Inc. (the "Company") (NYSE: SB), an international provider of marine drybulk transportation services, announced today that its public offering of 5,000,000 shares of common stock (the "Public Offering") was priced at $8.40 per share. The gross proceeds from the Public Offering before the underwriting discount and other offering expenses are expected to be approximately $42 million.

The Company has also granted the underwriters a 30-day option to purchase up to an additional 750,000 shares of the common stock.

The Company plans to use the net proceeds of the Public Offering for vessel acquisitions, capital expenditures and for other general corporate purposes, including repayment of indebtedness.

Morgan Stanley and BofA Merrill Lynch are acting as joint book-running managers and Evercore Partners is acting as co-manager of the Public Offering, which is being made under an effective shelf registration statement.

The Public Offering is being made only by means of a prospectus supplement and accompanying base prospectus. A preliminary prospectus supplement and accompanying base prospectus relating to the Public Offering has been filed with the Securities and Exchange Commission ("SEC") and is available at the SEC's website at http://www.sec.gov. When available, the final prospectus supplement and accompanying base prospectus relating to the Public Offering may be obtained from Morgan Stanley, 180 Varick Street, 2nd Floor, New York, NY 10014, telephone: 1-866-718-1649, Attn: Prospectus Department, email: prospectus@morganstanley.com, or BofA Merrill Lynch, 4 World Financial Center, New York, NY 10080, Attn: Prospectus Department, email: dg.prospectus_requests@baml.com.

The offering is subject to customary closing conditions.

This release shall not constitute an offer to sell, or the solicitation of an offer to buy, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

About Safe Bulkers, Inc.

The Company is an international provider of marine drybulk transportation services, transporting bulk cargoes, particularly coal, grain and iron ore, along worldwide shipping routes for some of the world's largest users of such services. The Company's common stock is listed on the NYSE, where it trades under the symbol "SB". The Company maintains its offices at 30-32 Avenue Karamanli, P.O. Box 70837, 16605 Voula, Athens, Greece.

Link to the press release: http://www.marketwire.com/press-release/Safe-Bulkers-Inc-Announces-Pricing-of-Its-Public-Offering-of-Common-Stock-NYSE-SB-1426274.htm

Safe Bulkers, Inc. Announces the Acquisition of Two Newbuild Panamax-Class Drybulk Vessels.

Safe Bulkers, Inc. (NYSE: SB), an international provider of marine drybulk transportation services, announced today that it has entered into shipbuilding contracts for the construction of two Japanese-built, drybulk Panamax-class vessels at attractive prices, with an expected delivery date in the first half of 2014.

Panamax-class drybulk vessels are sized to fit through the Panama Canal.  Safe Bulkers owns 4 Panamax-class vessels right now out of 16 ships total.  Those four ships average a daily charter rate of about $24,500.  According to their annual report these four ships are chartered through 2013 with some of the contract extending through 2015.  They were built between 2003 and 2005, so they are some of the oldest ships in Safe Bulkers fleet.

Safe Bulkers (SB) stock price has been on a steady rise since July 2010.  The stock has not seen a significant correction in 10 months.  Wait for the correction and a buying opportunity will present itself.

Buy Safe Bulkers below $8.00 per share.  It is trading for $9.37 as I write this.  See this 3 year stock chart to see what I’m talking about.

Image001

http://stockcharts.com/h-sc/ui?s=SB&p=W&b=5&g=0&id=p63466243318

Safe Bulkers, Inc. Announces the Acquisition of Two Newbuild Panamax-Class Drybulk Vessels

Safe Bulkers, Inc. (the "Company") (NYSE: SB), an international provider of marine drybulk transportation services, announced today that it has entered into shipbuilding contracts for the construction of two Japanese-built, drybulk Panamax-class vessels at attractive prices, with an expected delivery date in the first half of 2014.

Assuming the delivery of all of the Company's newbuilds on order, upon delivery of these two newbuild vessels in the first half of 2014, the Company's fleet will consist of 27 vessels with deadweight capacity of approximately 2.5 million tons.

Dr. Loukas Barmparis, President of the Company, said: "These new acquisitions are in line with our long term strategy to place orders at attractive prices in the right point of the cycle, seeking to renew and expand our fleet. We intend to offer our clients fuel efficient, shallow drafted, new generation designed vessels able to compete even in relatively weak markets. We believe that these acquisitions will be accretive to our earnings."

Here is the link to the original article: http://www.americanchronicle.com/articles/yb/157706195 .

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A Good High Dividend Stock in a Bad Neighborhood.

It's nice to see that I've found a great high dividend stock before Jim Cramer.  A caller asked him about Safe Bulkers the other day and Cramer responded that his didn't know the stock.  Here is what Cramer had to say after he learned more about Safe Bulkers (SB).
 
 Safe Bulkers (SB) has 16 dry bulk vessels and offers a 6.3% dividend. Cramer thinks the dividend is safe, since earnings are high enough to cover the dividend, the yield won't be raised again until 2012. SB is a good house in not such a good neighborhood, since the surplus of ships is an issue for the industry. With a 14% climb in just two weeks, Cramer might consider the stock an interesting buy on a pullback, but not at its current level.

 

 
I agree with Cramer that you should consider buying Safe Bulkers when it is in the low $8.00 to $7.00 range.  Any sizable market pullback should knock it down to that price range.  Here is the link to all the articles I've written on Safe Bulkers: http://www.myhighdividendstocks.com/category/high-dividend-stocks/sb.  I go into the issues in more detail than Cramer had time to expound upon on his show.
 
Disclosure: I don't own Safe Bulkers (SB) right now.  I'm waiting for a pullback.
 
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TIP OF THE WEEK - Find Corporate Bond Info On Your Stocks Easier Than You Ever Imagined

Find Corporate Bond Info on Your Stocks Easier Than You Ever Imagined

Jason Brizic

Apr. 8, 2011

The high dividend stock investor must be aware of a company’s corporate bond exposure to understand its potential threat to earning power.  A surge in bond interest due can threaten the earnings available for dividends.

You can avoid a tragic investment mistake by examining a company’s bond exposure before you make a common stock purchase.  Two stocks with the same earning power can have different bond exposures.  It is not enough to know the overall long-term debt total.  You must go slightly deeper to gain an edge over the market’s other investors.

Morningstar has an excellent corporate bond analysis feature within its stock pages to help you quickly, graphically, and easily understand the magnitude and maturity of a company’s corporate bond issuances.  Many high dividend stocks are large well established companies like AT&T (T) and Verizon (VZ) have many outstanding bonds.

Click on the link below to go directly to Morningstar’s bond tab for AT&T to see what I’m talking about:

http://quicktake.morningstar.com/StockNet/bonds.aspx?Symbol=T&Country=USA

Here is the link to Verizon’s (VZ) bond tab:

http://quicktake.morningstar.com/StockNet/bonds.aspx?Symbol=VZ&Country=USA

These two telecom companies are similar in many respects.  They should be compared.  Their bonds might be the deciding factor when deciding on which common stock to add to your high dividend stock portfolio.  Note: I haven’t scrutinized their bonds yet.  I’m just providing and examples with lots of bond info.

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

Two high dividend stocks facing dividend cuts. Put them on the watchlist.

Two high dividend stocks facing dividend cuts.  I took notice of Windstream (WIN) and First Energy (FE) the other day when I noticed their dividend yields in the 6-7% range.  These two companies are priced less than 20 times their 5 yr. average earnings which makes them possible investments.  However, both are paying out more in dividends than they are earning.  That is troubling because they won’t be high dividend stocks for long.  Their share prices will likely decline once the managements cut their dividends.  Both might prove to be high dividend stocks in future if their market prices drop more into the value territory of below 12 times average earnings and they keep a sustainable dividend.  Check them out in detail below.

Windstream (WIN)  POSSIBLE INVESTMENT, but wait until after the dividend cut

Market price: $12.58

Shares: 509.98 M

Dividend yield: 7.7% with a quarterly dividend of $0.25

ADJ EPS adjusts for changes in capitalization (share issuance or buybacks)

            EPS     Net inc.           ADJ EPS

2006    $1.25   $545.3 M         $1.07

2007    $1.94   $917.1 M         $1.80

2008    $0.93   $412.7 M         $0.81

2009    $0.76   $334.5 M         $0.66

2010    $0.66   $310.7 M         $0.61

5 yr. average earnings equals $0.99 per share.  12 times the 5 yr. average earnings equals $11.88.  20 times the 5 yr. average earnings equals $19.80.  Windstream is trading at 12.7 times the 5 yr. average earnings.  That makes it eligible for investment, but it is going to have to cut its dividend or issue more shares.  The company is paying over $1.00 per share in annual dividends, but it is only earning $0.61 per share.  I wouldn’t buy WIN at $12.58.  I would wait for the dividend cut and the market price to drop below $11.88 before reconsidering a purchase of WIN.

I have not closely examined Windstream’s dividend record, earnings power, or its balance sheet.  I will if the market price drops significantly below $11.88.

First Energy (FE)  POSSIBLE INVESTMENT, but wait until after the dividend cut

Market price: $37.00

Shares: 418.22 M

Dividend yield: 6.0% with a quarterly dividend of $0.52

ADJ EPS adjusts for changes in capitalization (share issuance or buybacks)

            EPS     Net inc.           ADJ EPS

2006    $3.81   $1,254 M         $3.00

2007    $4.22   $1,309 M         $3.13

2008    $4.38   $1,342 M         $3.21

2009    $3.29   $1,006 M         $2.41

2010    $2.57   $784 M            $1.87

5 yr. average earnings equals $2.72 per share.  12 times the 5 yr. average earnings equals $32.64.  20 times the 5 yr. average earnings equals $54.40.  First Energy is trading at 13.6 times the 5 yr. average earnings.  That makes it eligible for investment, but it is going to have to cut its dividend or issue more shares.  The company is paying a $2.08 per share in annual dividend, but it is only earning $1.87 per share.  I wouldn’t buy FE at $37.00.  I would wait for the dividend cut and the market price to drop below $32.64 before reconsidering a purchase of FE.

I have not closely examined First Energy’s dividend record, earnings power, or its balance sheet.  I will if the market price drops significantly below $32.64.

DISCLOSURE: I don’t own either of these common stocks.

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Buying Seadrill (SDRL) today would be speculative.

Morningstar initiated credit coverage of Seadrill (SDRL) today with an issuer rating of B.  Morningstar is concerned that Seadrill will not be able to pay for existing debt interest, add additional debt interest from planned rig purchases, and maintain its high dividend.  I share their concern.

I haven’t performed the methodical, deep analysis on Seadrill yet, but this information is not encouraging.  I believe that Seadrill common stock is too expensive to be bought as an investment right now.  Let me explain.

I didn’t compute Seadrill’s 2010 earnings in my last article that used Seadrill as one of the examples of investment and speculative stocks: http://bit.ly/SDRLexample .  I only computed the EPS through 2009.  I was attempting to compute Seadrill’s average earnings over 5 years, but Morningstar wouldn’t display the 2010 earnings.  However, the quarterly filings were available and I have since computed the 2010 EPS.

The following table is computed by using the net income available for common shares divided by current quantity of common shares (380.86 M):

            EPS (adjusted for changes in capitalization)

2006    $0.56

2007    $1.32

2008    ($0.43)

2009    $3.31

2010    $3.08

Seadrill’s five year average earnings (2006-2010) were $1.57 per share.  I recommend that you don’t pay more than 20 times the 5 year average earnings for any common stock to make an investment.  $1.57 x 20 = $31.40 per share is the upper limit for an investment basis.  Seadrill’s current market price is $37.21; therefore, Seadrill would qualify a speculative purchase at today’s market price.

I would consider buying Seadrill for under twelve times the 5 year average earnings.  $1.57 x 12 = $18.84 per share for a value investment basis.  SDRL last traded for $18.84 back in September 2009.

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New Credit Rating: Seadrill

by Morningstar Credit Committee | 04 Apr 11 

Morningstar is initiating credit coverage of Seadrill SDRL with an issuer rating of B. Seadrill is a leading offshore drilling contractor for the oil and gas industry. Our rating reflects the firm's aggressive business strategy of fully debt financing its rig construction program, stretched credit metrics, and aggressive dividend policy.

At the end of 2010, Seadrill had about $9.2 billion in total debt versus about $1.4 billion in available cash and marketable securities and $1 billion in investments. The debt is broken into $5.2 billion in credit facilities and debt that is secured by Seadrill's rigs, $1.8 billion in Ship Finance sales and leaseback transactions, and $2.2 billion in bonds, convertible bonds, and credit facilities supported by restricted cash. In early 2011, Seadrill bought two deep-water rigs for $1.2 billion, financed using bank debt. We estimate that at the end of 2011, Seadrill's EBITDA/interest ratio will be around 5.2 times, its debt/capital will be around 0.73, and its debt/EBITDA will be 4.7 times. Despite these stretched credit metrics, Seadrill currently pays out more than $1.0 billion in dividends annually.

In addition, Seadrill faces near-constant financing challenges. The majority of Seadrill's debt matures in five to seven years, and we estimate it has $5.2 billion coming due in the next three years. We do not think Seadrill's cash from operations will be enough for its needs, given its already announced rig construction spending of $4.6 billion. We estimate Seadrill will generate between $1.9 billion and $2.3 billion in operating cash flow annually over the next three years, or about $5.7 billion in the aggregate. Therefore, Seadrill needs to fill a financing gap of about $4.1 billion.

From a risk perspective, Seadrill's financial leverage has amplified its exposure to the inherent cyclicality of the contract drilling industry. Market day rates are volatile and outside drillers' control, which contributes to significant swings in profitability on a short-term basis. In addition, explosions, hurricanes, and government expropriation introduce tail risk to the firm's operations.

Link to original article: http://torontostar.morningstar.ca/globalhome/industry/news.asp?articleid=375748

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American Capital Agency Corp. (AGNC) Downgraded by Zacks Investment Research to "Neutral".

I downgraded American Capital Agency Corp. (AGNC) a several months ago because it isn’t earning enough money to sustain the quarterly $1.40 dividend payment.  You can see in this downgrade from Zacks that the company only earned $1.26 last quarter.

Click here to see all my analysis on AGNC: http://www.myhighdividendstocks.com/category/high-dividend-stocks/american-capital-agency-corp

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Link to original article: http://www.americanbankingnews.com/2011/04/01/american-capital-agency-corp-agnc-downgraded-by-zacks-investment-research-to-neutral/#

American Capital Agency Corp. (AGNC) Downgraded by Zacks Investment Research to “Neutral”

April 1st, 2011 • View CommentsFiled Under • by ABMN Staff

Filed Under: Analysts DowngradesMarket NewsZacks

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Equities research analysts at Zacks Investment Research downgraded shares of American Capital Agency Corp. (NASDAQ: AGNC) from an “outperform” rating to a “neutral” rating in a research note to investors on Thursday. The analysts currently have a $30.00 price target on the stock.

Analyst Meenu Goyal wrote, “We are changing our long-term recommendation for American Capital from Outperform to Neutral as we anticipate it to perform in line with the broader market. American Capital focuses exclusively on fixed-rate agency securities guaranteed by the U.S. government, which limits its credit risks. American Capital is also among a selected group of companies who have increased its dividend during the economic crisis. The company paid a total of $364.0 million in dividends or $13.26 per share since its initial public offering in May 2008. However, increased volatility and deterioration in the broader residential mortgage and RMBS markets limits the upside potential of the company going forward. “

Separately, analysts at Keefe, Bruyette & Woods, Inc upgraded shares of American Capital Agency Corp. from a “market perform” rating to an “outperform” rating in a research note to investors on Friday, February 11st. Also, analysts at Deutsche Bank (NYSE: DB) raised their price target on shares of American Capital Agency Corp. from $28.00 to $30.00 in a research note to investors on Wednesday, February 9th. They now have a “hold” rating on the stock.

Shares of American Capital Agency Corp. traded down 0.75% during mid-day trading on Friday, hitting $28.9226. American Capital Agency Corp. has a 52 week low of $24.06 and a 52 week high of $30.68. The stock’s 50-day moving average is $29.43 and its 200-day moving average is $28.91. The company has a market cap of $2.654 billion and a price-to-earnings ratio of 3.69.

American Capital Agency Corp. last announced its quarterly results on Tuesday, February 8th. The company reported $1.26 earnings per share (EPS) for the previous quarter, beating the Thomson Reuters consensus estimate of $1.25 EPS by $0.01. During the same quarter in the prior year, the company posted $1.79 earnings per share. The company’s quarterly revenue was up 185.1% on a year-over-year basis. On average, analysts predict that American Capital Agency Corp. will post $0.00 EPS next quarter.

American Capital Agency Corp. (AGNC) is a real estate investment trust (REIT). AGNC earns income primarily from investing in residential mortgage pass-through securities and collateralized mortgage obligations. These investments consist of securities, for which the principal and interest payments are guaranteed by United States Government-sponsored entities, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) or by a United States Government agency, such as the Government National Mortgage Association (Ginnie Mae). The Company is externally managed by American Capital Agency Management, LLC, a subsidiary of a wholly owned portfolio company of American Capital, Ltd.

For more information about Zacks Investment Research’s equity research offerings, visit Zacks.com.