With a new year underway I decided to slightly alter the screen I use to attempt to find undervalued dividend growth stocks. I discuss my metrics in further detail below, but the specific changes I made was to decrease the amount of years necessary for a stock to pay an increasing dividend from 20 years to 15 years and I put a moving target with regards to market cap to remove some of the smaller, thinly traded companies.
Decreasing the requisite amount of years to even start the screen provided me with another 53 companies to look at (157 vs 210)! The market cap minimum was a way to eliminate the noise. Invariably, every month I would find a company that I may buy and then when I went to the chart/metrics I would find that 100 shares are traded daily and it was only work $23,000,000. I am just not getting involved in a company like that so why waste any 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 night of January 9, 2017) 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
Given that we are all time highs I was assuming that the price to earnings metric would knock out a ton of stocks, but I was shocked to knock out 75%! Applying this screen I went from 210 equities to 51!
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 51 remaining equities to 45:
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 reduced my stocks from 45 to 38:
I am not chasing yield, but at the same time, I want to be paid for owning the company – this month I chose 2.5% (a bit higher than last few months). This brought us down to 20 Companies.
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 15 companies:
Market Cap Elimination
People often confuse stock price with the size of the company, and the two are unrelated. The size of the company in terms of total worth is found in the Market Cap. Calculating Market Cap is easy,
Market capitalization is just a fancy name for a straightforward concept: it is the market value of a company’s outstanding shares. This figure is found by taking the stock price and multiplying it by the total number of shares outstanding
I eliminated all companies worth less than $500,000,000, and this left us with 5 companies to check out. Unfortunately, none of those companies are new meaning that my addition of 15 – 19 year dividend growth payers didn’t make it this far.
Dividend Growth Stock Watch List January 2017
The above screen (which I did by hand) leaves me with the following stocks to watch
- Arrow Financial Corp. AROW
- Community Trust Banc. CTBI
- Old Republic International ORI
- Southside Bancshares SBSI
- T. Rowe Price Group TROW
- Target Corp. TGT
- Wal-Mart Stores Inc. WMT
Anyone like a particular company in the list?