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.

Revisiting First Energy (FE).

Today I revisit First Energy (FE) for the second time.  This is the thirteenth article out of fifteen covering the stocks that Seeking Alpha contributor Insider Monkey recommended a few weeks ago.  Most of the stocks on his list were yielding between 4% to 5%, so they are potential 6% high dividend stocks when the market slides due to a second worldwide recession.  I’m trying to find the ones with high dividends, earning power, and strong balance sheets.  First Energy looks promising in the $30 - $32 price range, but I have some concerns over the sustainability of their dividend.  Read on to see how I came to that conclusion.

First Energy (FE)

Price: $44.15

Shares: 418.22 million

Market capitalization: $18.46 billion

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Preferred stock: none

Bonds: $4.7 billion.  The bonds don’t appear to be a threat to the dividend anytime soon.

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DIVIDEND RECORD: First Energy (FE) has paid a dividend since at least 1998.  It paid $0.38 quarterly in 1998.  It has grown the dividend to $0.55.

Dividend: $0.55 quarterly

Dividend yield: 4.98% ($2.20 annual dividend / $44.15 share price)

Dividend payout: 91.6% ($2.20 annual dividend / $2.40 recent EPS on Google Finance) OR 86.9% ($2.20 annual dividend / $2.53 avg. adjusted earnings)

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Share price for 6% dividend yield: $31.66 ($2.20 / 0.06)

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EARNING POWER: $2.53 @ 418.22 million shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

2007

$4.22

$1,309 M

310 M

$3.13

2008

$4.38

$1,342 M

307 M

$3.21

2009

$3.29

$1,006 M

306 M

$2.41

2010

$2.42

$742 M

305 M

$1.77

2011

$2.21

$885 M

418.22 M

$2.12

Five year average adjusted earnings per share is $2.53

Consider contrarian buying below $20.24 (8 times average adjusted EPS)

Consider value buying below $30.36 (12 times average adjusted EPS)

First Energy (FE) is currently trading at 17.45 times average adjusted EPS.  This is stock is priced for investment, but it is getting close to speculative.

Consider speculative selling above $50.60 (20 times average adjusted EPS)

BALANCE SHEET – Why can’t this company reduce liabilities in order to gain equity.

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Book value per share: $31.75

Price to book value ratio: 1.39 (under 1.0 is good)

Current ratio: 0.69 latest quarter (over 2.0 is good) Little current assets to cover this year’s liabilities.

Quick ratio: 0.04 latest quarter (over 1.0 is good) Almost no cash to cover this year’s liabilities.

Debt to equity ratio: 2.20 (lower is better)  Lots of debt to equity.

Percentage of total assets in plant, property, and equipment: 64.1% (the higher the better)  Current assets account for 7%, intangibles 13.6%, other long term assets 15.2%.  Find out what the intangibles and others are before you invest.

CONCLUSION – As usual, the best time to buy First Energy (FE) in recent years was in March 2009.  It was a value investment back then.  First Energy is a steady dividend payer and moderate grower.  I’m concerned that the company doesn’t have the earning power to keep up with a growing dividend payment.  The company is still priced for investment at this time, but it is much closer to speculative pricing than value.  Start scaling out of it when the price hits $50.60.  The balance sheet is weak when you look at the price to book value ratio and the current ratio and quick ratios.   The company is going to have to issue more debt or stock to finance its current operations.  You can safely ignore this stock until it drops back to the $30.00 - $32.00 range where the dividend yield climbs above 6% and the price to book value ratio approaches 1.0.

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DISCLOSURE – I don’t own First Energy (FE).

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TIP OF THE WEEK - How to see 10 years of financial info in just two clicks

How to see 10 years of financial info in just two clicks

Jason Brizic

Apr. 15, 2011

Serious investors want to quickly absorb a company’s earning power and balance sheet strength over a long period of time to make better investment decisions.  A long period of time usually contains a Federal Reserve induced boom and bust.  Investors want to know how a potential stock purchase performed during the boom and bust times so they can estimate the potential risk/reward ratio.  We have experienced a boom (2003-2007) and a bust (2008-2009) in the past 10 years.

Big Promise – If you only look at the past year or three of financials, then you might be ignoring some valuable investment information.  You want to be able to quickly see how a company’s average earning power, book value per share, and other key ratios have changed over time to see how the company performed in good times and bad.

Specific claims – Morningstar.com has a 10 years of summary financials available for free on its “Key Ratios” tab.  You can get to it in two clicks.  Type your stock ticker in the Quote box at the top of the homepage and then click on “Key Ratios”.  This is very helpful during the stock screening process.  I use three rows of numbers from this view when I first examine a company: Revenue, Net Income, and Book Value per Share.

Follow with the proof – Here is the “Key Ratios” view of the 6% high dividend stock First Energy (FE) that I’m examining.

http://financials.morningstar.com/ratios/r.html?t=FE&region=USA&culture=en-US

I immediately click on the Export action button to get the data in a spreadsheet.  I use the spreadsheet to find the average net income over the 10 year period.  First Energy averaged $913.2 million in earnings per year (2001-2010).  I take that number divided by the number of current shares (418.22 million).  That gives me average earnings per share over 10 years ($2.18).  Then I multiple the average earnings by 12 and 20 to see if the current market price is below 12x average earnings (VALUE), between 12x-20x average earnings (INVESTMENT), or above 20x average earnings (SPECULATIVE).

$2.18 x 12 = $26.16

Market price = $38.43 (possible INVESTMENT basis)

$2.18 x 20 = $43.60

I can also see that First Energy’s book value per share is $28.02.  I can also see in a glance that revenues have fluctuated between a low of $7.999 billion in 2001 and $13.627 billion in 2008).  This sets me up for the next round of detailed analysis.  I will put First Energy on my watch list at around $28 per share while I perform that analysis.

For more tips, go here:

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

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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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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