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URL:  http://boards.fool.com/kelbon-the-ipig-portfolio-uses-several-metrics-30690358.aspx

Subject:  Re: iPIG Portfolio FAQ v. 1.0.1 Date:  5/18/2013  7:33 AM
Author:  TMFBigFrog Number:  127 of 543

Kelbon,

The iPIG portfolio uses several metrics together to judge whether an investment is a fit. You're absolutely right that too much borrowing can sink a company, hence the "debt to equity ratio between around 0 and 2" metric in the buy criteria. Similarly, the payout ratio requirement helps alert to companies that are struggling to adequately cover their costs. No individual metric is really sufficient to judge whether a company is worth owning, but working across several helps make a much better case.

Within the iPIG portfolio at the moment, UPS is a company whose debt to equity ratio and payout ratio both jumped into alert levels since being bought. This was pointed out in the recent review article on it: http://www.fool.com/investing/dividends-income/2013/05/08/is... . The company would not pass the buy criteria today, but since the cause of the jump was a "one-time pension charge" and the company's operating cash flows are still strong, I'm willing to cut it some slack at the moment. If in future quarters, the company doesn't show signs of whittling down its debt ratio or if its operations aren't producing sufficient cash, then it'll get sold.


Operating earnings are always greater than net earnings.
That's not necessarily always the case. Cash from operations is a very important metric not only because it measures a company's ability to generate dollars, but also because it is less easily moved around by 'one time factors' than net income. Companies can book 'net' earnings from non-operational factors, such as when Sirius XM booked $3 billion from an income tax related accounting reversal in the June 2012 quarter: http://satelliteradioplayground.com/2012/08/07/sirius-xm-rad... . If I remember my accounting correctly, I believe gains from divestitures can also show up as non-operating earnings.

-Chuck
Inside Value Home Fool
Disclosure: I own shares of United Parcel Service.
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