Every month I attempt to purchase a lot or two (a lot for me is $500 – I hope to increase that in the future) of a possibly undervalued stock that has increased their dividend every year for the past 15 years. In an effort to find those undervalued dividend growers I use certain metrics with regard to the company’s price to earnings, operating margin vs industry and price to book vs industry. I also screen for yield and market cap as well to further limit the watch list. Lastly, I compare the remaining companies to their 52 week and 52 week low.
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 February 14, 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
Similar to last month this screen, alone, removed 75% of the companies!
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 56 remaining equities to 50:
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 50 to 43:
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 23 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 further reduced the number of companies to look at to 13
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 9 companies:
Dividend Growth Stock Watch List January 2017
The above screen (which I did by hand) leaves me with the following stocks to watch
- Cincinnati Financial CINF
- Community Trust Banc. CTBI
- Old Republic International ORI
- PPL Corp – PPL
- SCANA Corp – SCG
- Southside Bancshares SBSI
- T. Rowe Price Group TROW
- Target Corp. TGT
- Wal-Mart Stores Inc. WMT
Anyone like a particular company in the list?