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.

I've been wrong about AGNC for the past year.

I’ll admit it.  I was wrong about American Capital Agency Corp. (AGNC) share price direction in the last year.  I thought that their shrinking interest rate spreads and dividend cuts would have hurt the share price, but they haven’t.  There has been a sustained 10 month rally in AGNC stock since November 2011.  Eventually this rally must end, but Keynesian investors don’t seem to care.  They love the Federal Reserve’s QE3.

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AGNC is a mortgage REIT.  They make money by borrowing short term and then lend the money long term by buying agency mortgage backed securities.

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First Look at Penn West Petroleum (PWE).

I used to own Penn West Energy (PWE) several years ago when it paid a monthly dividend.  Today I take a first look at PWE on this blog.  The dollar values are in Canadian dollars, but the exchange rate is 1 USD = 0.99499 CAD.  They are basically interchangeable at today’s exchange rates.  PWE is a high dividend stock, but it has some earnings and balance sheet problems that will be exacerbated by falling energy prices.  The price of oil and natural gas will drop when the world falls back into recession due to the sovereign debts crisis.  To see how I can to these conclusions read on.

Penn West Petroleum (PWE)

Price: $14.19

Shares: 474.58 million

Market capitalization: $6.74 billion

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What does the company do to earn profits?  Penn West Petroleum Ltd., based in Calgary, Alberta, is an independent Canadian energy company focused on the exploration and production of oil and natural gas resources in nearly 6.5 million acres across Saskatchewan, Alberta, and British Columbia. At the end of 2011, the company reported proven reserves before royalties of 499 million barrels of oil equivalent. Daily production averaged about 163,000 barrels of oil equivalent in 2011, at a ratio of 63% oil/37% gas.

Morningstar’s take: Penn West seeks to develop oil and gas reserves in the relatively mature environment of the Western Canadian sedimentary basin. Management's strategy is two-pronged: Develop additional reserves in existing producing zones through horizontal drilling and enhanced recovery efforts, and perform exploratory drilling to add new reserves. Exploration efforts are concentrated in light and medium oil plays, as Penn West seeks to increase oil in the production mix and take advantage of more the desirable oil pricing environment.

Bonds outstanding: none

Times bond interest earned: not applicable

Preferred stock: none.

DIVIDEND RECORD  Penn West Petroleum (PWE) paid a monthly dividend through 2010.  In 2011, they switched to quarterly dividends.  But, they also cut the dividend in 2009, 2010, and 2011.  Here are the annual dividend payments over the last few years.

Dividend: $0.27 quarterly ($1.08 annual dividend)

Dividend yield: 7.6% ($1.08 annual dividend / $14.19 share price)

Dividend payout ratio: 85.7% using earning power of $1.26 per share

EARNING POWER – $1.26 @ 474.58 million shares

(Earnings adjusted for changes in capitalization)

EPS

Net income

Shares

Adjusted EPS

2007

$0.73

$176 M

242 M

$0.37

2008

$3.22

$1,221 M

383 M

$2.57

2009

($0.35)

($144 M)

413 M

($0.30)

2010

$2.48

$1,110 M

452 M

$2.34

2011

$1.36

$638 M

467 M

$1.34

2012

474.58 M

Six year average adjusted earnings per share is $1.26

Consider contrarian buying below $10.08 (8 times average adjusted EPS)

Penn West Petroleum is currently trading at 11.3 times average adjusted EPS.  This stock is priced for value.

Consider value buying below $15.12 (12 times average adjusted EPS)

Consider speculative selling above $25.20 (20 times average adjusted EPS)

BALANCE SHEET – The company’s lack of current assets and cash compared to current liabilities shows its financial weakness

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Book value per share: $19.10 ($9.067 B equity / 474.58 M shares)

Price to book value ratio: 0.74 (under 1.0 is good)

Tangible book value: $14.78 (equity - $2.02 B in intangibles / 474.58 M shares)

Price to tangible book value ratio: 0.96 (under 1.0 is really good)

Current ratio: 0.50 (over 2.0 is good) ($675 M current assets / $1.333 B current liabilities)

Quick ratio:  no cash so N/A (over 1.0 is good) 0.36 according to Morningstar.com.  They probably used the receivables as a substitute of cash.

Debt to equity ratio: 0.38 (lower is better)

Percent of total assets:

            Real assets (property, plant, and equipment) – 79.27%

            Current assets – 4.3%

            Intangibles – 12.86%

            Other long term assets – 3.57%

CONCLUSION – Penn West Petroleum is currently a high dividend stock, but its dividend is not entirely safe.  The company reported disappointing 2nd quarter 2012 earnings. 

http://www.nasdaq.com/article/penn-west-quarterly-profit-declines-on-lower-prices-cuts-outlook---update-20120810-00378

Oil and natural gas prices have been down and will go down further when the worldwide recession worsens.  It is a value stock by common measures trading at only 11.3 times average adjusted earnings, but I think you’ll be able to buy it below $10.00 per share when the recession hits in 2013-2014.  I don’t like the weak current ratio and quick ratio.  That makes the balance sheet weak in my opinion.  Put this one on your watch list for under $10.00.

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DISCLOSURE – I don’t own Penn West Petroleum (PWE).

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The Soveriegn Debt Crisis in Europe and What It Means to Your Investments.

European Union bureaucrats are fessing up that the Greek government still can’t pay its bills.

http://www.marketwatch.com/story/us-stocks-fall-on-greece-debt-restructure-news-2012-07-24

This news tanked markets in the US.  Anyone who is surprised by this news has not been paying attention to the sovereign debt crisis in Europe.  This crisis is going to get worse when Greece gets bailed out for a second or third time.  Portugal, Italy, and Spain will be back for more bailouts of their own.  Where will the money come from.  The European Central Bank will print Euros.  The money will go to the Northern European banks who will be scared to lend it, so they will buy more bad debt of the PIIGS.

I would stay out of the stock market until this sovereign debt crisis has run its course.  You will know it is over when stock prices drop 40% - 60% from their May 2012 highs of about 13,000 on the Dow Jones Industrial Average.  Well run companies with fat dividend yields and decent balance sheets like Safe Bulkers (SB) can have their stock price cut from $6.00 per share down to $2.50 per share like in 2008-2009.  Safe Bulkers fell precipitously from its 2008 IPO price of $19.00 per share down to about $2.50 at the height of the financial crisis.

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I’m spending my time during the sovereign debt crisis analyzing stocks to find the best ones to buy in the aftermath and at what price.  This crisis will take a long time to unravel.

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Shipping Industry Current Ratios and The Erosion of the Current Ratios Since the 1930's.

I’m always looking for high dividend stocks with earning power and strong balance sheets.  I consider a dividend yield above 6% to be a high dividend stock.  To see why read this: http://bit.ly/6percentDIV.  But don’t let that article distract you.  The focus of this article is going to be on the balance sheet measure known as the current ratio.

There are many measurements of strong balance sheets.  A company’s current ratio is one such measure of a strong balance sheet.  The current ratio is the company’s current assets (usually cash, equivalents, and accounts receivable) divided by its current liabilities (those are liabilities due within one year such as accounts payable and the current portion of the long term debt, etc.).

One of my favorite companies is Safe Bulkers (SB).  They are a dry bulk shipping company.  Unfortunately their current ratio has dropped in the last few quarters.  It currently stands a 0.73.  The father of value investing, Benjamin Graham, consider a current ratio of 2.0 the minimum for investment.  He wrote that back in his book Security Analysis in the 1930’s.  Safe Bulkers current ratio seems really low.  That made me wonder how all the other shipping companies compare.  Here is what I found:  (Note - The size of the bubbles represent the company’s market capitalization in millions of dollars.  For example, Knightsbridge Tankers has a market cap of $303 million.)

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Here is a table with most of the largest publicly traded shipping companies used in the graphic above:

Company

Ticker

Market Capitalization (Millions of dollars)

Current Ratio

Dividend Yield

Kirby Corp.

(KEX)

$                          3,710

1.48

0.00%

Golar LNG Limited

(GLNG)

$                          2,920

0.41

3.13%

Teekay LNG Partners

(TGP)

$                          2,700

0.58

6.44%

Teekay Corp.

(TK)

$                          2,490

1.00

3.51%

Alexander & Baldwin

(ALEX)

$                          2,230

0.99

2.44%

Seacor Hldgs.

(CKH)

$                          1,960

2.59

0.00%

Golar LNG Partners

(GMLP)

$                          1,350

0.49

4.85%

DryShips

(DRYS)

$                          1,310

0.78

0.00%

Ship Finance Intl.

(SFL)

$                          1,060

1.11

8.85%

Seaspan Corp.

(SSW)

$                          1,030

2.74

4.30%

Navios Maritime Partners

(NMM)

$                             901

1.12

10.60%

Costamare Inc.

(CMRE)

$                             832

0.61

10.64%

Diana Shipping

(DSX)

$                             650

9.00

0.00%

Frontline Ltd.

(FRO)

$                             488

2.45

3.38%

Safe Bulkers

(SB)

$                             475

0.73

8.65%

Danaos Corp.

(DAC)

$                             444

0.40

0.00%

Navios Maritime

(NM)

$                             384

1.47

6.38%

Overseas Shipholding

(OSG)

$                             359

2.44

0.00%

Knightsbridge Tankers

(VLCCF)

$                             303

7.30

16.09%

Intl. Shipping Corp.

(ISH)

$                             150

1.30

4.88%

Box Ships

(TEU)

$                             147

0.96

13.17%

Star Bulk Carriers

(SBLK)

$                               53

0.62

6.26%

The average current ratio of the shipping industry is 1.84.  If you throw out the highest and lowest current ratios, then you get 1.56.  So the average of the industry by either measure is below what Graham considered acceptable.  That is interesting.  What was the ratio of the shipping industry in Graham’s day?  Fortunately for use he produced a gem of a table in his 1937 book Interpretation of Financial Statements which I’ve included here:  The 8 companies in shipping had an average current ratio of 3.7.

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I have a sickening feeling that almost every industry nowadays will have an average current ratio below 2.0.  My hypothesis is that decades of Keynesian MBA finance grads have abandoned saving money to ensure financial resilience in a bad economy (like 2008-2009).  Keynesians hate savings because they believe that it causes consumer spending to go down and therefore the economy goes down.  If you want to learn more about this, then read Henry Hazlitt’s The Failure of the New Economics available free from www.mises.org.  He’s got a whole section on the faulty logic of Keynes’ “Paradox of Thrift”.

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First look at Enerplus Corporation (ERF). Huge dividend, weak balance sheet.

Seeking Alpha contributor, EFSinvestment, wrote that Enerplus Corporation (ERF) is a buy at today’s price of $17.76.  His article is here: http://seekingalpha.com/article/513701-dividend-stock-ideas-2-buys-3-holds .  He pays no attention to the effects of a worldwide recession on oil and natural gas prices.  That will hurt earning further.  And he pays no attention to the balance sheet.  This is what he wrote:

Enerplus Corporation - Buy

With a dividend yield of 12.1%, Enerplus is one of the top-yielding Canadian commodity stocks. In the last year, the company paid $389 million in dividends. While it might be claimed that the payout ratio is unsustainable, I think the dividend is pretty safe. It is more than fully covered by the company's operating cash flow. Enerplus generated an operating cash flow of $641 million in the last 12 months.

(click to enlarge)

(Source: Finviz.com)

Due to company's exposure to natural gas-related assets, the stock has lost more than 26% in this year alone. However, it looks like a cheap deal after the recent sell-off. Enerplus is trading near its book value. The P/S and P/CF ratios stand at 2.4, and 5.3, respectively. The company has substantial assets in the Marcellus and Bakken shales. Morningstar claims that these assets could prove highly productive in the long term.

My FED+ fair model suggests a fair value range of $20 - $38. Analysts mean target price of $26.79 fits almost perfectly at the middle of my fair value range. The current price of $18 suggests that Enerplus is deeply undervalued. I think the stock is oversold, and ready for a big bounce. That is why I rate it as a buy.

Here is my first look analysis of Enerplus Corporation

Enerplus Corporation (ERF)

Price: $17.76

Shares: 196.30 million

Market capitalization: $3.48 billion

All the financial numbers are in Canadian dollars.  Fortunately the US dollar and Canadian dollar are at near parity.  Here is a Google Finance chart of the last 10 years of USD to CAD exchange rates.

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What does the company do – Enerplus, based in Calgary, Alberta, is an independent energy company engaged in the exploration for and production of oil and gas in the Western Canadian Sedimentary Basin and Pennsylvania's Marcellus Shale. At the end of 2010, the company reported proven reserves of 219.4 million barrels of oil equivalent. Daily net production averaged about 83,139 barrels of oil equivalent per day in 2010 at a ratio of 58% gas/42% liquids.

Morningstar’s take - The passing of 2010 marked a series of changes for Enerplus as it converted from an income trust to a corporation. The company sold off conventional and oil sands assets, using the proceeds to build its acreage position in Pennsylvania's Marcellus Shale and the Bakken in North Dakota and Saskatchewan. We think the company will continue to pay an attractive dividend and aggressively pursue production growth in the Marcellus and Bakken.

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Bonds: According to Morningstar.com Enerplus Corp has no bond data available.

Times interest earned:  ERF’s 2011 net income was $109 million and the company paid $60 million in interest charges.  This means that the company earned only 1.81 times the interest on its long term debts.  The father of value investing, Benjamin Graham, believed that a company should earn fully four times the interest charges to warrant the purchase of shares of an industrial preferred stock.

Preferred stock: none

Margin of profit: 8.19%  Profit margins were between 18.7% and 37.9% from 2002 through 2008.  Since then they have ranged between 6.9% and 9.4%.

DIVIDEND RECORD: Enerplus Corporation cut its dividend 57% from $0.42 monthly in late 2008 to $0.18 monthly since the beginning of 2009.  There has been no dividend growth since the cut.

Dividend: $0.18 monthly

Dividend yield: 12.16%  ($2.16 annual dividend / $17.76 share price)

Dividend payout: 386% ($2.16 / $0.56 EPS in 2011) –OR- 133% ($2.16 / $1.62 average adjusted earning power).  Either way ERF the dividend is not safe by any measure.  The world is reentering recession.  That will drive the price of oil down and natural gas price will not recover anytime soon.  I expect another significant dividend cut in the next year.

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EARNING POWER: $1.62* @ 196.3 million shares

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

EPS

Net income

Shares

Adjusted EPS

2005

$3.95

$432 M

109 M

$2.20

2006

$4.47

$545 M

122 M

$2.78

2007

$2.66

$340 M

128 M

$1.73

2008

$5.53

$889 M

161 M

$4.53

2009

$0.53

$89 M

170 M

$0.45

2010

($1.02)

($179 M)

176 M

($0.91)

2011

$0.61

$109 M

180 M

$0.56

Seven year average adjusted earnings per share is $1.62

Consider contrarian buying below $12.96 (8 times average adjusted EPS)

Enerplus Corporation (ERF) is currently trading at 10.96 times average adjusted EPS.  This is stock is value priced.

Consider value buying below $19.44 (12 times average adjusted EPS)

Consider speculative selling above $32.40 (20 times average adjusted EPS)

BALANCE SHEET – ERF’s current ratio and quick ratio reveal how tenuous their balance sheet is.

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Book value per share: $16.69 ($3,277 million shareholder equity / 196.3 million shares)

Tangible book value per share: $15.90 (shareholder equity – intangible assets of $155 million / shares)

Price to book value ratio: $1.06 (under 1.0 is good)

Price to tangible book value ratio: 1.11 (under 1.0 is great)

Current ratio: 0.27 latest quarter (over 2.0 is good)

Quick ratio: 0.011 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.26 (lower is better)

Percentage of total assets in plant, property, and equipment: 90.98% (the higher the better)

Working capital trend is down.  That means that ERF must find funding to make up the difference.  This is a bad sign coupled with the extreme dividend payout ratio.

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CONCLUSION – The best time to buy Enerplus Corporation in recent years was in 2009 when the stock bottomed around $15 per share.  However there is a worry-some downward spike in the price during the “flash crash” of May 2010.  I don’t like stocks that get pummeled in flash crashes.  ERF is a high dividend stock yielding over 12%, but the dividend is not safe based on the expected earnings in the near future.  The world is slipping back into recession.  Europe is already in recession, China is moving towards recession, and the US data keeps getting worse.  Recessions cause oil prices to drop.  That will reduce ERF’s earnings like in 2009.  Natural gas has dropped, dropped, dropped.  Maybe it stabilizes at around $2 per MCF or $3, but the point is that it will not miraculously go back up to $10 - $14 per MCF with all the supply increases due to the fracking technology.  I expect ERF to cut their dividend significantly again when its obvious to the common man that worldwide recession is back.  The stock price is value now, but it will be even cheaper in the near future.  ERF’s balance sheet has several weaknesses.  Their low current ratio and quick ratio shows that the company has little current assets to pay for current liabilities.  Those liabilities will need to be funded through additional stock offerings or increasing long term debts.  This isn’t a single year issue.  Look at the working capital trend to see a company that is always short of paying its current liabilities from current assets.  I would ignore this company until they cut their dividend and improve their balance sheet.

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DISCLOSURE – I don’t own Enerplus Corporation (ERF).

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The Interpretation of Financial Statements - Ratio Analysis using Safe Bulkes (SB) as an example

I recently finished reading Benjamin Graham’s 1937 classic The Interpretation of Financial Statements.  Graham explains the financial statement concepts in clear English.  At the end of the book he walks the reader through the analysis of a balance sheet and income statement using the ratio method.  His example was Bethlehem Steel Corporation.

I will do the same with Safe Bulkers (SB).

A number of the ratios used in the analysis of an industrial company’s income account and balance sheet are presented herewith by the use of a single example – namely the financial statements of the Safe Bulkers corporation for 2011.  Various items in the Balance Sheet and Income account are numbered.  This will facilitate the explanation as to the method of computing ratios.  For example margin of profit, the first ratio computed in this study, is operating income divided by sales.  On the Income Account operating income is item No. 4 and sales is item No. 1.  The method of computing margin of profit is expressed at (4) ÷

0image007
(1) or in actual amounts $108,936,000 ÷
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$172,036,000 = 63.3%

SAFE BULKERS

Income Account Year Ended December 31, 2011

(1)

Revenues

$172,036,000

Commissions

(3,128,000)

(2)

Voyage, vessel operating, general and administrative expenses

(36,542,000)

Early redelivery income

207,000

(3)

Depreciation

(23,637,000)

(4)

Operating Income

$108,936,000

Add – interest, dividends, and other misc income

0

(5)

Total Income

$108,936,000

(6)

Deduct-Interest charges

(19,202,000)

(7)

Net Income

$89,734,000

(8)

Deduct-Dividends on Preferred Stock

0

(9)

Net for Common Stock

$89,734,000

Deduct-Dividends on Common Stock

$42,536,652

(10)

Transferred to Surplus

$47,197,348

BALANCE SHEET

SAFE BULKERS

December 31st, 2011

ASSETS

Current Assets:

(11)

Cash, time deposits

$28,121,000

(12)

Other current assets

9,838,000

(13)

Accounts and notes receivable

0

(14)

Inventories

0

(15)

Total Current Assets

$37,959,000

Advances for vessel acquisition and vessels under construction

$122,307,000

Restricted cash non-current

5,423,000

Long-term investment

50,000,000

Other non-current assets

6,226,000

(16)

Vessels

?

(17)

Less reserve for depreciation and depletion

0

(18)

Vessels, net

$655,356,000

Total Long Term Assets

$ 839,312,000

Total Assets

$877,271,000

LIABILITIES

Current Liabilities:

Current portion of long-term debt

$18,486,000

Other current liabilities

$33,187,000

(19)

Total Current Liabilities

$ 51,673,000

(20)

Long-term debts, net of current portion

$465,805,000

(21)

Other non-current liabilities

$27,951,000

Total Non-current Liabilities

$493,756,000

(22)

Common stock 70,894,420 shares, no par value?

0

(23)

Shareholder equity (Surplus)

$331,842,000

Total Shareholder Equity

$331,842,000

Total Liabilities

$877,271,000

Margin of Profit

Operating income divided by Sales.

Formula: (4) ÷

0image007
(1)

Some examples of high price to tangible book values.

Last Friday I wrote my “Tip of the Week” on book value and its calculation.  I used the original writing of legendary value investor Benjamin Graham in that article.  If you missed it, then you can get it here:

http://www.myhighdividendstocks.com/high-dividend-stocks/tip-of-the-week-book-value-or-equity-and-how-to-calculate-book-value-per-share

At the end of the article I calculated the tangible book value of Safe Bulkers (SB).  Today I will take a look at the tangible book value of a few more stocks: AT&T (T), Verizon (VZ), Terra Nitrogen (TNH), Goldcorp (GG), Southern Copper (SCCO), and Apple (AAPL).

AT&T (T) tangible book value

Shareholder equity equals $105.534 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  AT&T claimed $70.842 billion in goodwill assets as of 4Q2011 and $59.343 billion in intangibles.  AT&T’s tangible book value is negative $24.651 billion dollars.  The company has 5.93 billion shares outstanding.  AT&T’s tangible book value per share is negative $4.15 dollars.  That really stinks.  Maybe Verizon has a positive net book value per share.  AT&T stock sold for $30.64 recently.  Their price to tangible book value ratio is negative.

Verizon (VZ) tangible book value

Shareholder equity equals $35.97 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Verizon claimed $23.357 billion in goodwill assets as of 4Q2011 and $79.128 billion in intangibles.  Verizon’s tangible book value is negative $66.515 billion dollars.  The company has 2.84 billion shares outstanding.  The tangible book value per share is negative $23.42 dollars.  That really stinks also.  Verizon stock sold for $37.46 recently.  Their price to tangible book value ratio is negative.

Terra Nitrogen (TNH) tangible book value

Shareholder equity equals $269.3 million.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Terra Nitrogen claimed no goodwill or intangibles as of 4Q2011.  Terra Nitrogen’s tangible book value is $269.3 million.  The company has 18.69 million shares.  The tangible book value per share is $14.41.  That is very low compared to the current stock price.  Terra Nitrogen stock sold for $262 per share recently.  Their price to tangible book value ratio is 18.18.  Shareholders that bought at $262 are paying $18.18 for each $1.00 in tangible assets.  That is a whopping premium on invested capital.  A smart businessman would never overpay so much for so little assets.  Stay away from Terra Nitrogen because there is much more risk than reward.

Goldcorp (GG) tangible book value

Shareholder equity equals $21.272 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Goldcorp claimed no goodwill of $1.737 billion as of 4Q2011.  Goldcorps’s tangible book value is $19.535 billion.  The company has 810 million shares.  The tangible book value per share is $24.11.  Goldcorp stock sold for $41.04 per share recently.  Their price to tangible book value ratio is a respectable 1.7.  Goldcorp stock will be cheap when the price is near one times tangible book value.

Southern Copper (SCCO) tangible book value

Shareholder equity equals $4.015 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Southern Copper claimed intangibles of $110 million as of 4Q2011.  Southern Copper’s tangible book value is $3.905 billion.  The company has 840.98 million shares.  The tangible book value per share is $4.64.  Southern Copper’s stock sold for $30.46 per share recently.  Their price to tangible book value ratio is an overpriced 6.56.  SCCO share holders who bought near $30.46 are paying $6.56 for each dollar of invested capital.

Apple (AAPL) tangible book value

Shareholder equity equals $76.615 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Apple claimed $896 million in goodwill and $3.536 billion in intangible in their 4Q2011 financials.  Apple’s tangible book value is $72.183 billion.  The company has 932.37 million shares.  The tangible book value per share is $77.42.  Apple’s stock sold for $636.23 per share recently.  Their price to tangible book value ratio is grotesque 8.22.  AAPL share holder who bought near $636 are paying $8.22 for each dollar of invested capital.

Goldcorp is the only stock on this short list with a price to tangible book value under 2.0 and even that isn’t cheap.  I wrote this article to serve as a warning to value investors and high dividend stock investors.

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TIP OF THE WEEK - Book Value or Equity and How to Calculate Book Value per Share

Book Value or Equity and How to Calculate Book Value per Share

Jason Brizic

April 6th, 2012

Knowing the book value of a company helps the intelligent investor to buy low.

You want to buy assets that produce profits as cheap as possible.

The following comes from Benjamin Graham’s 1937 book The Interpretation of Financial Statements.

The book value of a security is in most cases a rather artificial value.  It is assumed that if the company were to liquidate, it would receive in cash the value at which its various tangible assets are carried on the books.  Then the amounts applicable to the various securities in their due order would be their book value.  (The word “equity” is frequently used instead of book value in this sense, but it is generally applied only to common stocks and to speculative senior securities.)

As a matter of fact, if the company were actually liquidated the value of the assets would most probably be much less than their book value as shown on the balance sheet.  An appreciable loss is likely to be realized on the sale of the inventory, and a very substantial shrinkage is almost certain to be suffered in the value of the fixed assets.  In practically every case the adverse conditions which would lead to a decision to liquidate the business would also make it impossible to obtain anywhere near cost or reproduction price for the plant and machinery.

The book value really measures, therefore, not what the stockholders could get out of their business (its liquidating value), but rather what they have put into the business, including undistributed earnings.  The book value is of some importance in analysis because a very rough relationship tends to exist between the amount invested in a business and its average earnings.  It is true that in many individual cases we find companies with small asset values earning large profits, while others with large asset values earn little or nothing.  Yet in these cases some attention must be given to the book value situation, for there is always a possibility that large earnings on the invested capital may attract competition and thus prove temporary; also that large assets, not now earning profits, may later be made more productive.

CALCULATING BOOK VALUE

As has already been said, in calculating book value it is assumed that the company’s assets are worth the figure shown on the balance sheet.  Indeed, book value simply means the value as shown by the books or balance sheet.

To take a simple example, a company’s balance sheet is as follows:

Fixed Property

$1,000,000

Capital Stock

$1,700,000

Good-will

500,000

Surplus

100,000

Current Assets

500,000

Current Liabilities

200,000

$2,000,000

$2,000,000

In this case the capital stock is represented by 17,000 shares of $100 par value common stock.  To find the book value of the common stock, add the $100,000 surplus to the $1,700,000 value shown for the stock, making a total of $1,800,000.  Then look on the asset side of the balance sheet for intangibles.  You will find $500,000 good-will.  This is then deducted from the $1,800,000, leaving $1,300,000 equity available for the 17,000 common shares.  Incidentally, the figure $1,300,000 is often referred to as the “net tangible assets” of the company.  Dividing this out, the net book value per share would be $76.47.

If you had not deducted the intangibles and had simply divided the $1,800,000 by the 17,000 shares you would have found the book value per share to be $105.88.  You will not that there is quite a difference between this book value and the net book value of $76.47 a share.  If only “book value” of the stock is mentioned, tangible or net book value is usually meant.  The larger figure may be termed: “Book value, including intangibles.”

I will perform this calculation on one of my favorite high dividend stocks – Safe Bulkers (SB)

Fixed Property

$777,663,000

Capital Stock

$71,000

Intangibles

0

Additional Paid-in Capital

114,918,000

Current Assets

37,959,000

Retained Earnings

216,853,000

Other Investments

11,649,000

Current Liabilities

51,673,000

Other Long Term Assets

50,000,000

Non-current Liabilities

493,756,000

$877,271,000

$877,271,000

All of this balance sheet information is as of 4Q 2011.  Safe Bulkers has since added another 5,750,000 shares and $37,375,000 in additional paid-in capital since the 4Q 2011 report.  Safe Bulkers had 70,896,924 shares at the time of the 4Q 2011 financials report.

Safe Bulkers had $331,842,000 in book value at the end of 4Q 2011 (equity values – intangibles; highlighted in yellow above).  Divided that by 70,896,924 shares and you get a book value per share of $4.68.  That would be a very nice, low price to buy Safe Bulkers at.  Safe Bulkers sold for $3.00 - $2.50 per share at the depths of the 2009 recession.

Safe Bulkers book value per share rises to $4.82 if you include the additional paid-in capital the company raised after 4Q 2011.  This also assumes they didn’t incur any new liabilities in the meantime either.

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American Capital Agency Corp (AGNC) Cut Its 1Q 2012 Dividend 10.7%

It was only a matter of time until American Capital Agency Corp. (AGNC) cut its dividend.  AGNC was paying out more than they were earning for several quarters.  Their dividend payout ratio was over 100%.  I warned about this back on December 13th, 2011.

http://tinyurl.com/blcxzln

At that time faceless, nameless Wall Street analysts expected AGNC to earn $1.18 per share for the 4th quarter of 2011.  Their 4Q 2011 financials revealed that they only earned $0.99.  That pushed the dividend payout ratio all the way up to 141%.  This madness had to stop.  It finally did.

On February 6th, 2012 AGNC’s board of directors announced a 10.7% dividend cut.

http://www.reuters.com/finance/stocks/AGNC.O/key-developments/article/2475150

They cut the dividend from $1.40 per quarter down to $1.25 per quarter for March 2012.  That breaks their streak of ten consecutive quarters of $1.40 dividend payments.

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The Federal Reserve will likely buy more agency mortgage-backed securities in the future.  This will bid up the price of those securities.  That will eat into AGNC’s shrinking profits.  The cost of borrowing is increasing and the asset yield is decreasing.  You can read about that here in AGNC’s 4Q 2011 financials release: http://tinyurl.com/bq5fgfz  

The dividend is not secure.  AGNC is leveraged 7.6 times.  Leverage giveth and leverage taketh away.  I expect another cut in a few quarters.

Disclosure: I don’t own American Capital Agency Corp. (AGNC).

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First Look at 9% High Dividend Stock Vector Group LTD (VGR). Stop Smoking and Stop Buying VGR.

Today I take a look at tobacco company Vector Group LTD (VGR).  I’d never heard of Vector before running a high dividend stock screen recently.  They are a 9% high dividend stock, but is their dividend safe?  No.  How is the stock priced relative to earning power?  Speculatively priced.  What about their balance sheet?  It is awful.  Read on to see how bad the numbers are for this company.  There is a reason the company’s stock price has only increased 0.32% in 10 years while price inflation has eroded over 30% of the dollars purchasing power in the same time.

Vector Group LTD (VGR)

Price: $17.72 (last week)

Shares: 79.57 million

Market capitalization: $1.41 billion

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Preferred stock: None.

Bonds: $1.7 billion outstanding.  Nothing is due soon, but Vector has other debt troubles (see balance sheet below).

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What does the company do?  Vector Group manufactures cigarettes through subsidiaries. Its Liggett Group subsidiary produces cigarettes under discount brands and private labels. The company also produces cigarettes in Russia. Recently, Vector Group has launched QUEST, which it claims is a genetically engineered nicotine-free cigarette.

DIVIDEND RECORD: Vector Group is a steady dividend payer and grower, but the money company is paying out more than it earns.

Dividend: $0.40

Dividend yield: 9%  ($1.20 annual dividend / $17.72 share price)

Dividend payout: 129%  ($1.20 / $0.93 recent EPS) –OR- 164% ($1.20 / $0.73 average adjusted earning power)

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EARNING POWER: $0.73 per share @ 79.57 million shares

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

EPS

Net income

Shares

Adjusted EPS

12/2007

$0.93

$74 M

74 M

$0.93

12/2008

$0.69

$61 M

82 M

$0.77

12/2009

$0.31

$25 M

77 M

$0.31

12/2010

$0.68

$54 M

78 M

$0.68

12/2011

$0.93

$75 M

79 M

$0.94

Five year average adjusted earnings per share is $0.73

Consider contrarian buying below $5.84 (8 times average adjusted EPS)

Consider value buying below $8.76 (12 times average adjusted EPS)

Consider speculative selling above $14.60 (20 times average adjusted EPS)

Vector Group LTD (VGR) is currently trading at 24 times average adjusted EPS.  This is stock is speculatively priced.

BALANCE SHEET – Hideous!!  Negative equity!

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Most of the damage to the balance sheet has been due to an increase of short-term debts and other long-term liabilities.

Fiscal year ends in December. $USD in millions except per share data.

2007-12

2008-12

2009-12

2010-12

2011-12

Current liabilities

Short-term debt

21

97

22

52

135

Accounts payable

7

6

4

9

10

Deferred income taxes

24

93

17

37

36

Taxes payable

12

44

30

25

Accrued liabilities

34

69

46

40

42

Other current liabilities

24

19

15

59

68

Total current liabilities

109

296

149

227

315

Non-current liabilities

Long-term debt

277

Deferred taxes liabilities

142

49

45

52

61

Accrued liabilities

2

Pensions and other benefits

35

34

39

46

Other long-term liabilities

156

304

512

678

593

Total non-current liabilities

575

388

591

769

702

Total liabilities

684

684

740

996

1017

Book value per share: ($1.12)  Vector Group has a negative book value per share.  This means stay away at any price.  There are much better stocks to buy.

Price to book value ratio: Not applicable because of the negative book value (under 1.0 is good)

Current ratio: 1.61 latest quarter (over 2.0 is good)

Quick ratio: 1.00 latest quarter (over 1.0 is good)

Debt to equity ratio: Not applicable because they have no equity. (lower is better)

Percentage of total assets in plant, property, and equipment: 6.1% (the higher the better)  Other assets include: Current assets 54.94%, Intangibles 11.59%, and Long Term Assets 27.32%

CONCLUSION – Vector Group LTD is a 9% high dividend stock, but I don’t trust their ability to payout the dividend in the future.  They are going to have to issue more shares or debt to finance the dividend.  The stock is speculatively priced at 24 time average adjusted earning power.  The balance sheet is horrifying.  They have negative equity and no plan to fix the situation.  I wouldn’t buy this stock until its balance sheet is repaired.  Stay away from Vector Group LTD.  It is headed for a cliff when the worldwide recession reappears.  This appears to be a poorly run company.

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DISCLOSURE – I don’t own Vector Group LTD (VGR)

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