I was absolutely excited to do this month’s undervalued dividend growth watch list. The market is ROARING with the election of Trump, so I figured if I could find something that has been missed (or entirely ignored by big money) then it would a great long term hold. 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. So why am I excited this month? With the market hitting all time highs daily it means that price to earnings ratio will be high, operating margins will be low, price to book will be high, yield will be low and a lot of stocks will be near 52 weeks high. As you’ll see below those are normally bad things for searching, but it also means if I can buy something to buy, now will be the time.
Applying my Valuation Metrics to Dividend Growth Stocks
All my data comes from a snap shot in time (I did the research on the nights of November 14 and November 15) 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. For example, after I did my screen Target beat earnings so my numbers may be simply wrong.
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 particular month applying this screen I went from 156 equities to 41! 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.
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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 36:
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,
price-to-book ratio (P/B Ratio) is a ratio used to compare a stock’s market value to its book value.
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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
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This took us down to 28:
Yield Elimination
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 19 Companies.
Payout Ratio
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
- UGI Corp. UGI
- Wal-Mart Stores Inc. WMT
- Northeast Indiana Bancorp NIDB
- Chubb Limited CB
I then compare these companies’ current price with their 52 week high and low. I don’t always follow it, but I like the idea that there is a built in additional safety buying closer to the 52 week low.
Anyone like a particular company in the list?
i love this post!
I am trying to sell some puts on some companies of the list.
Today i sold a put on WMT with 95 dollars premium 🙂
thanks a lot for the list!
keep it up!
Boom. Great list. Thanks for taking the time to aggregate the listing of companies. I own several companies on the list and I have analyzed/had a few on my watch list over the year. Can’t go wrong with the quality of the dividend streams for the most part.
Have a great weekend!
Bert
Your list is very similar to mine. Some great undervalued companies up in there.