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.
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 equity.a company generates with each dollar of shareholders’
Let’s assume Company XYZ generated $10 million in 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:last
ROE = $10,000,000/$20,000,000 = 50%
This means that Company XYZ generated $0.50 of stock an ROE of 50%.for every $1 of shareholders’ equity last year, giving the
Why it Matters:
ROE is more than a measure of 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.; it’s a measure of efficiency. A rising ROE suggests that a company is increasing its ability to generate
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
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.
|Name||Symbol||Price to Earnings||PE Industry||Payout Ratio||ROE||ROE Industry||P/B||P/B Industry|
|Archer Daniels Midland||ADM||16.2||20.69||46%||9.11||8.32||1.37||1.7|
|Black Hills Corp.||BKH||16.59||16.57||51%||10.59||7.09||1.66||1.59|
|Eagle Financial Services||EFSI||14.51||15.27||39%||9.48||8.44||1.34||1.24|
|Old Republic International||ORI||11.3||11.69||40%||12.09||10.53||1.21||1.25|
|J.M. Smucker Co.||SJM||10.89||20.69||28%||17.52||8.32||1.76||1.7|
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.