For the past few years, I have shared the painstaking task of taking the dividend champion (25+ years of dividend growth) and part of the dividend contender list (20+ years of dividend growth) and screen against stated metrics to narrow down my watch list for the month. I then buy a lot or two depending on the month; a lot being defined as $500.
Thoughts Prior to Screen: With the recent volatility that occurred in February I am pretty excited to see what stocks, if any, got slammed as part of the larger market pull back that we have seen 19 days into the new month. Whereas last month I wanted to add a completely new company, if it as all possible, I’d like to dollar cost average down a stock I already own. If I can roll out of some assigned puts (and that is a big if for February) I am going to try and buy a few lots. This is pretty unlikely to occur this month as I am holding a few assigned puts that are (way) underwater.
My Screening Metrics
I recently made the decision that I am going to change up the screening metrics every 6 months or so. This is a conscious decision because I am not entirely convinced that I, or anyone else for that matter, can have a fool proof way to determine what is undervalued. Notwithstanding, the crux of the screen will be the same (i.e. looking at valuation metrics). This is the second 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 165 companies (it was 162 last month).
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 February 2018 Watch List
After applying the above screens my original list of 164 was reduced to just 11! I like that this is higher than last month’s 6 because maybe it may mean that there was a correction in something I already own.
So what Companies am I looking to Buy?
|Name||Symbol||Industry||Price to Earnings||PE Industry||Payout Ratio||ROE||ROE Industry||P/B||P/B Industry|
|Chesapeake Financial Shares||CPKF||Banks – Regional – US||14.45||15.21||0.18||10.39||8.44||1.42||1.22|
|NACCO Industries||NC||Home Furnishings & Fixtures||6.31||19.97||0.18||20.52||7.7||1.35||1.65|
|Matthews International||MATW||Personal Services||17.22||19.64||0.23||13.31||10.36||2.08||2.17|
|AFLAC Inc.||AFL||Insurance – Life||8.14||13.68||0.25||20.12||10.01||1.45||1.28|
|Cardinal Health Inc.||CAH||Medical Distribution||12.06||18.85||0.32||26.77||9.39||2.87||2.32|
|Eagle Financial Services||EFSI||Banks – Regional – US||14.4||15.21||0.39||9.48||8.44||1.33||1.22|
|Computer Services Inc.||CSVI||Information Technology Services||19.07||26.72||0.5||19.14||6.04||3.53||3.13|
|Weyco Group Inc.||WEYS||Footwear & Accessories||19.34||19.71||0.54||8.39||7.7||1.6||1.65|
|Consolidated Edison||ED||Utilities – Regulated Electric||15.71||16.50||0.56||10.88||8.57||1.56||1.54|
|Old Republic International||ORI||Insurance – Diversified||10.93||11.81||0.56||12.08||10.54||1.16||1.26|
|Archer Daniels Midland||ADM||Farm Products||15.4||20.26||0.59||9.19||8.34||1.37||1.72|
Anyone familiar with any of these companies? Any opinion either way?