April 2018 Dividend Growth Undervalued Watch List

///April 2018 Dividend Growth Undervalued Watch List

April 2018 Dividend Growth Undervalued Watch List

Every month I apply certain screening metrics, defined below, to sift through those companies that have increased their dividend for at least 20 years.  The screening metrics will change every 6 months, since I am not convinced that I have a fool proof way to determine when a company’s stock price is undervalued.

Thoughts before the screen:  With volatility creeping back in vogue, I am not entirely sure what to expect in terms of an outcome.  My hope is that some of that volatility has spilled into some of these long term dividend paying companies.  Maybe, an unloved sector provides me with a few options?

My Screening Metrics

This is the fourth of the six screens using the following conditions.

First thing is first, I start with the publicly traded companies that have increased their dividend for at least twenty years.  This means that even in the middle of the dot com bust and the great recession their dividends increased.  This initial list is 167 companies (it was 166 last month).  I use the dividend champion list as well as part of the dividend contender list to find my starting companies.

Price to Earnings

Next, I remove all those stocks that have a price to earnings ratio either above 20 or that have a P/E that is more than their industry average.

Payout Ratio

Then, I remove all those companies that use more than 60% of their income to pay out the dividend.  I do not want my purchases to have to cut their dividend anytime soon.  Just because a company increased their dividend for 20 years, if they can’t afford it they can’t afford it now.

Return on Equity

This metric is brand new to me.  Return on equity is,

a measure of profitability that calculates how many dollars of profit a company generates with each dollar of shareholders’ equity.

***

Let’s assume Company XYZ generated $10 million in net income last year. If Company XYZ’s shareholders’ equity equaled $20 million last year, then using the ROE formula, we can calculate Company XYZ’s ROE as:

ROE = $10,000,000/$20,000,000 = 50%

This means that Company XYZ generated $0.50 of profit for every $1 of shareholders’ equity last year, giving the stock an ROE of 50%.

Why it Matters:

ROE is more than a measure of profit; it’s a measure of efficiency. A rising ROE suggests that a company is increasing its ability to generate profit without needing as much capital. It also indicates how well a company’s management is deploying the shareholders’ capital. In other words, the higher the ROE the better. Falling ROE is usually a problem.

However, it is important to note that if the value of the shareholders’ equity goes down, ROE goes up. Thus, write-downs and share buybacks can artificially boost ROE. Likewise, a high level of debt can artificially boost ROE; after all, the more debt a company has, the less shareholders’ equity it has (as a percentage of total assets), and the higher its ROE is.

Some industries tend to have higher returns on equity than others. As a result, comparisons of returns on equity are generally most meaningful among companies within the same industry, and the definition of a “high” or “low” ratio should be made within this context.

I decided to screen ROE against the industry average.  As such I am looking for more efficient companies when compared to their industry.

Price to Book Value

Book value,

refers to the total amount a company would be worth if it liquidated its assets and paid back all its liabilities.

***

Why it Matters:

Since book value represents the intrinsic net worth of a company, it is a helpful tool for investors wanting to determine if a company is underpriced or overpriced, which could indicate a potential time to buy or sell. For instance, value investors search for companies trading for prices at or below book value (indicating a price-to-book ratio of less than 1.0), which implies the shares are selling for less than the company’s actual worth.

In the past I had screened for screen for price to book value of under 4; now I am just screening for a book value lower than the company’s industry.

My April 2018 Watch List

Please remember, these companies popped up on my screen when I took a snapshot one evening.  If you are reading this post days, weeks or months, the companies’ metrics likely changed.  After applying the above screens my original list of 166 was reduced to 10!  Last month I had 14 to choose from.

NameSymbolPrice to EarningsPE IndustryPayout RatioROEROE IndustryP/BP/B Industry
Archer Daniels MidlandADM16.220.6946%9.118.321.371.7
AT&T Inc.T7.4618.3841%23.17.211.542.17
Black Hills Corp.BKH16.5916.5751%10.597.091.661.59
Cincinnati FinancialCINF11.8917.2732%18.236.251.491.43
Consolidated EdisonED15.7516.7656%10.888.591.561.59
Eagle Financial ServicesEFSI14.5115.2739%9.488.441.341.24
NACCO IndustriesNC8.4420.3824%7.624.071.161.72
Old Republic InternationalORI11.311.6940%12.0910.531.211.25
J.M. Smucker Co.SJM10.8920.6928%17.528.321.761.7
Matthews InternationalMATW16.5418.2623%13.3110.7122.22

So many new companies!I only have positions in ORI and T, so I am excited to dig deeper into some of these companies to decide what I am buying this month.

By | 2018-04-17T12:36:43+00:00 April 17th, 2018|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. Troy Bombardia @ Bull Market April 17, 2018 at 8:30 pm - Reply

    The thing is, a lot of companies that are undervalued are undervalued for a reason (e.g. lack of growth in the company). That means that although the company will throw off decent dividends, the company’s growth is limited (i.e. limited capital gains).

    • Evan April 23, 2018 at 9:44 am - Reply

      Troy,

      You *could* be correct or you could be way off. If you picked up TGT a year ago you’d be looking at a 20% gain (as of this very specifically timed comment). I bought some back then in a few of my accounts. Obviously, that is a cherry picked example but they are out there.

  2. Troy @ Bull Market April 22, 2018 at 8:57 pm - Reply

    What do you think about Johnson and Johnson or AT&T

    • Evan April 23, 2018 at 9:45 am - Reply

      I bought AT&T last month actually

Leave A Comment