As you might imagine, I devote quite a bit of my average daily work schedule to the study of corporate cash flow statements. Whenever I'm evaluating a potential new recommendation, I want to make sure there's enough incoming cash flow to meet dividend obligations.
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And if there isn't, well, then I need to know that, too.
But quite often, it's not the lack of cash flow that leads to dividend cuts. It's an overleveraged balance sheet. Debt can be a powerful tool when wielded properly. But many companies get in over their heads to the point where interest payments consume an unhealthy portion of the budget, leaving less for other needs.
Are debt levels out of line with other peers in the industry? Are the borrowings at fixed or variable rates (an important consideration in today's rising rate environment)? Does the company have access to lines of credit that can be tapped in an emergency? Have lenders insisted on restrictive debt covenants that might be triggered?
There are numerous metrics to help monitor a firm's financial health. But for the purposes of today's screen, I want to focus on current ratio. Simply put, this expresses current assets as a percentage of current liabilities. The higher the ratio, the more likely the company can service its short-term obligations coming due over the next 12 months.
Current assets include cash, marketable securities, accounts receivable and inventory. This is what's on hand to pay short-term notes and accounts payable to suppliers.
Here's what it looks like for Apple (Nasdaq: AAPL).
Current Assets (3/31/18):
Cash and cash equivalents: $45,059
Short-Term Marketable Securities: $42,881
Accounts receivable: $14,324
Total Current Assets: $130,053M
Accounts Payable: $34,311
Accrued Expenses: $26,756
Deferred Revenue: $7,775
Commercial Paper: $11,980
Current Debt: $8,498
Total Current Liabilities: $89,320M
As of last quarter, Apple had a current ratio of 1.45 ($145B/$89B). In other words, for every $1 coming due, the company has $1.45 in assets on hand. That's a pretty comfortable situation, especially for a business with speedy inventory turnover.
With all this in mind, here are the double-digit yielders with some of the strongest current ratios.
As always, this screen is simply meant to uncover candidates that meet certain criteria. The stocks in the table above haven't been fully researched and shouldn't necessarily be considered portfolio recommendations.
As with any metric, current ratio tells us something, but not everything about a company. So it shouldn't be used in isolation, nor should it be used as the basis of comparison between companies operating in different industry groups.
That being said, it can be a useful aid when looking for businesses that are well-positioned to meet their obligations over the next year. I would recommend going a step further and also evaluating the firm's acid (or quick-test ratio), which is similar but excludes inventory from the calculation. Inventory isn't always easy to liquidate, so this is a more stringent measure.
In any case, I'm happy (but not surprised), to see a few of my High-Yield Investing holdings on this list. Most double-digit yielders have a current ratio below 1.0, which can be maintained temporarily but is a potential red flag nonetheless. But these standouts have more than enough assets to cover their liabilities.
At the top, Horizon Tech Finance (Nasdaq: HRZN) has one of the more asset-rich balance sheets in the group. The business development company makes loans to private tech and life sciences outfits in need of capital. Since 2004, Horizon has invested $1.2 billion in loans to 200 carefully-screened borrowers.
The interest on these loans is collected and disbursed monthly to stockholders. The board has already approved upcoming payments for June, July and August in the amount of $0.10 per share – which puts the annual payout at $1.20 and the yield at 12%.
While I'll need to do more digging to determine if this is a quality candidate for addition to our portfolio in High-Yield Investing, I like what I've seen so far.
As always, if I find a real gem within these screens, my High-Yield Investing subscribers will be the first to hear about it.
So if you'd like to join us in our search for the best high yields the market has to offer, then I want to invite you to learn more about High-Yield Investing. You don't have to settle for the paltry yields offered by most stocks. The high yields are still out there. You just have to know where to look -- and my staff and I are here to help you along. To start earning more income now, check out this report.
This article originally appeared on StreetAuthority.com.