With my crazy increase in naked put premiums last month I was excited to get my watch list created, so I can buy my monthly purchase plus my extra amount made. Like last month, I excited to create this list as it was we hit another market high today. If the old adage is to buy low and sell high, why would I be excited to make a purchase now? Just because the market is flying high doesn’t mean there is not value to be found. Just maybe I can find something that hasn’t increased with the broad market.
As a reminder, every month I take those stocks that have increased their dividends for 20+ years and manually screen them to create a watch list for my monthly purchase. The goal is simple, I try to find stocks that have a two decade history of increasing the cash flow given to investors that may be a bit unloved at the time of purchase.
Applying my Valuation Metrics to Dividend Growth Stocks
All my data comes from a snap shot in time (I did the research on the night of December 5, 2016) and all metrics come from Morningstar.com. Warning: This, along with every other screen, is a snapshot in time, and as such, you can’t really rely on it. Rather, the screen should be used just as a starting point for your own research.
Price to Earnings Elimination
First, I eliminate all those stocks with Price to Earnings ratio of 20+ or higher than the individual company’s industrial average. “Price to Earnings” is defined as,
The Price/Earnings Ratio or P/E Ratio is a stock’s current price divided by the company’s trailing 12-month earnings per share from continuous operations.
A fund’s price/earnings ratio can act as a gauge of the fund’s investment strategy in the current market climate, and whether it has a value or growth orientation
This month I was a little more lenient in the hopes of finding something I haven’t seen in a while. This particular month applying this screen I went from 156 equities to 40! One third of stocks were eliminated just by trying to apply the blandest of all metric valuations.
Operating Margin Elimination
My next screen is eliminating those companies whose Operating Margin is less than their Industry’s average. Operating Margin is defined as,
a margin ratio used to measure a company’s pricing strategy and operating efficiency.
Operating margin is a measurement of what proportion of a company’s revenue is left over after paying for variable costs of production such as wages, raw materials, etc.
Operating margin gives analysts an idea of how much a company makes interest and taxes on each dollar of sales. Generally speaking, the higher a company’s operating margin is, the better off the company is. If a company’s margin is increasing, it is earning more per dollar of sales.
This particular month I went from 41 remaining equities to 35:
Price to Book Elimination
Third on the list is eliminating those stocks with a Price to Book ratio of above 4 (or if above 4 in line with the industry average). Price to Book is defined as,
A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company
This took us down to 27:
I am not chasing yield, but at the same time, I want to be paid for owning the company – this month I chose 2.0% (same as the past few months). This brought us down to 18 Companies.
Last, but certainly not least, we have the payout ratio. I do not want to buy into a company whose dividend could be in jeopardy because they are paying too much of their free cash flow to the owners. The payout ratio for the trailing twelve months has to be under 60%. This got us down 14 companies:
Dividend Growth Stock Watch List November 2016
The above screen (which I did by hand) leaves me with the following stocks to watch
- AFLAC Inc. AFL
- Bemis Company BMS
- Chesapeake Financial Shares CPKF
- Community Trust Banc. CTBI
- Eagle Financial Services EFSI
- Farmers & Merchants Bancorp FMCB
- First Financial Corp. THFF
- Genuine Parts Co. GPC
- T. Rowe Price Group TROW
- Target Corp. TGT
- Wal-Mart Stores Inc. WMT
- West Pharmaceutical Services WST
- Chubb Limited CB
- Northeast Indiana Bancorp NIDB
Anyone like a particular company in the list?