December 2017 Undervalued Dividend Growth Watch List

///December 2017 Undervalued Dividend Growth Watch List

December 2017 Undervalued Dividend Growth Watch List

I don’t have a lot of faith that I’ll find something new this month.  The stock market seems to hit new weekly highs, so when I put it through my metrics it feels like I’ll end up with the same companies.  We’ll see!

My Screening Metrics

In an attempt to find undervalued, unloved companies I use certain metrics which are defined below.  First and foremost, the company must have increased their dividends for at least 20 years.  To gather this information I use the Dividend Champion list (as well as part of the Dividend Contenders list).  Both lists are updated monthly by David Fish.  In the past, I used the Dividend Aristocrat list, but one of the criteria for the Dividend Aristocrat is that it is a member of the S&P500, however, that is not all that important to me so I use the more encompassing list.

Once I have the base list, which this month includes over 160 companies I start applying certain requirements on the following metrics.  This list is done by hand every month and so the numbers stay static, and as such should only be used as a starting point for your research.

Market Capitalization

Market Capitalization is defined as,

Market capitalization refers the total dollar market value of a company’s outstanding shares. Commonly referred to as “market cap,” it is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to using sales or total asset figures.

Market Cap is broken down into a few categories (micro, small, mid-sized, and large):

  • Small Caps are usually defined as companies between $300,000,000 and $2,000,000,000
  • Mid Caps are usually defined as companies between $2,000,000,000 and $10,000,000,000
  • Large Caps are usually defined as companies above $10,000,000,000

I have chosen to remove any companies with a market cap of less than $500,000,000.  This removed 12 companies.

Pricing to Earnings Metrics

I have opted to use two separate but related price to earnings screens.  I should note that even prior to opening up the spreadsheet I knew that the limitations placed on these two metrics were going to eliminate most of the available companies, especially in today’s market environment.  

The first screen was to remove all those stocks with a P/E Ratio of over 20.  Price to Earning is an extremely common way to value companies.  It compares the companies stock price to what they actually earn.  For example, if a stock is trading for $20/share and it earns $2/share it will have a P/E of 10.  I think in the future, I may increase this number to 25 and then take into account the industry average after that.

The second P/E metric used was a Shiller P/E under 20.  The Shiller P/E takes into account past earnings rather than just the previous quarter or 4 quarters:

Value investors Benjamin Graham and David Dodd argued for smoothing a firm’s earnings over the past five to ten years in their classic text Security Analysis. Graham and Dodd noted one-year earnings were too volatile to offer a good idea of a firm’s true earning power. In a 1988 paper economists John Y. Campbell and Robert Shiller concluded that “a long moving average of real earnings helps to forecast future real dividends” which in turn are correlated with returns on stocks. The idea is to take a long-term average of earnings (typically 5 or 10 year) and adjust for inflation to forecast future returns. The long term average smooths out short term volatility of earnings and medium-term business cycles in the general economy and they thought it was a better reflection of a firm’s long term earning power.

Shiller later popularized the 10-year version of Graham and Dodd’s P/E as a way to value the stock market. Shiller would share the Nobel Memorial Prize in Economic Sciences in 2013 for his work in the empirical analysis of asset prices.

Currently, the market as a whole is hitting all-time highs in both an objective number (i.e. the S&P) as well as value (i.e. Shiller P/E), and as such, these two metrics eliminated almost all of the companies!  Not a problem, but I may change the two metrics in a few months.

Operating Margin Screen

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. It can be calculated by dividing a company’s operating income (also known as “operating profit“) during a given period by its net sales during the same period. “Operating income” here refers to the profit that a company retains after removing operating expenses (such as cost of goods sold and wages) and depreciation. “Net sales” here refers to the total value of sales minus the value of returned goods, allowances for damaged and missing goods, and discount sales.

***

Operating margin is also often known as “operating profit margin,” “operating income margin,” “return on sales” or as “net profit margin.” However, “net profit margin” may be misleading in this case because it is more frequently used to refer to another ratio, net margin.

I want the companies I choose to buy to be more profitable than their industry peers.

Dividend Yield

Dividend Yield is the amount that is paid to the shareholders as it relates to the current price of the stock.  So for example, if ABC company is worth $20/share and it is paying $2/yr in a dividend it has a 10% yield.  There are a lot of investors that “chase yield” which is moving their capital around looking for high yield stocks.  While I am not interested in that strategy, I do want to get paid for owning the company, and as such, I set a floor of 2.0% yield this month (last month it was 2.0% as well).

Payout Ratio

Payout ratio refers to how much of a company’s earnings are being used to support the dividend.  Since I am obviously interested in companies that can continue growing their dividend I do not want the payout ratio too high or else it will become unsustainable.  I have set the ceiling at 60% of earnings.

December Watch List

This is my starting point.  The metrics below are taken as just a snapshot on the night of December 14th and so they obviously could change in the morning nevertheless months or years after this post is published:

NameSymbolMarket Cap (mil)P/EShiller PEOp. MarginIndustry Op. MarginYieldPayout Ratio
AFLAC Inc.AFL$34,762,288,76912.915.818.798.161.960.25
Chubb LimitedCB$67,832,112,72017.718.0913.719.381.880.33
Community Trust Banc.CTBI$835,981,58717.519.5537.1532.072.680.47
Farmers & Merchants BancorpFMCB$559,774,92917.220.3940.6932.071.970.33
First Financial Corp.THFF$558,625,33916.317.9634.232.072.140.35
International Business MachinesIBM$142,571,821,23812.911.8215.534.783.840.48
Southside BancsharesSBSI$996,616,16117.918.7838.5732.073.160.54
Target Corp.TGT$33,668,891,17713.217.156.462.883.910.51
United TechnologiesUTX$98,831,014,01519.319.614.214.872.180.41

A lot of the same names are popping up.  Right this second, as I write this post I feel like starting a new position.

 

Have you looked at any of these companies?

By | 2017-12-14T16:29:20+00:00 December 15th, 2017|Dividend Investment Portfolio|4 Comments

About the Author:

Evan is the owner of My Journey to Millions which was started to track his journey from a broke debt ridden law school graduate to building a positive balance. Need more Evan? Follow him on Twitter, Contact him or get new posts directly to your email

4 Comments

  1. Dividend Diplomats December 17, 2017 at 2:43 pm - Reply

    Interesting list. Interesting that so many of the stocks on your list are banks. Are you looking to make any moves in the banking industry?

    Bert

    • Evan December 18, 2017 at 11:35 am - Reply

      I have noticed since I started this little project years ago that my metrics often lead me to banking and insurance industries. I am not exactly sure why. Any ideas why? Years and years ago, I figured it was because of my requirements for a normal P/B but doesn’t seem to matter! Maybe those industries don’t get the love and attention because they are boring?

  2. Engineering Dividends December 19, 2017 at 4:25 pm - Reply

    Hi Evan, from your list I own AFL and TGT. AFL I’ve owned for over 20 years, but TGT is a new holding. With regard to AFL, they’ve historically had a low PE, relative to the market. I’d have to look, but I wouldn’t be surprised if they’ve been trading over the past few years with a PE in 7-13 range. Given this, I’d imagine they’d continue to show up on you screen, even if their price goes higher (and I might think some people would consider AFL overvalued at their current price). Many financials and insurers tend to have low PEs, and may show more readily on the screen, while many tech stocks tend to have high PEs, and would fail to show. For new companies to shake out of your screen, you may have to tweak the PE thresholds to work by industry, so that the PE levels make sense for that industry. Thanks for sharing the watch list.

    • Evan December 19, 2017 at 9:21 pm - Reply

      I have had AFL for years too…you were well compensated with shares during that 2008 and 2012! I used to screen for industry as long as it was under a 20 P/E, I think I am going to start doing that again next year. Thanks for the reminder.

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