March 2020 Undervalued Dividend Growth Screen and Purchase

by Evan

While I am putting my head in the sand when it comes to my net worth statement, I am actually excited to get a purchase or two under my belt with my new dividend screener for 2020.

Screening for Undervalued Dividend Growth Stocks

In the beginning I would only look for those companies with 25+ years of dividend growth history, and then I eventually moved it down to 20+ years. For the upcoming 9 months or so (maybe more), I will be starting with those companies that have increased their dividend from 15 to 24 years (taken from the dividend contender list). Currently, this whittles us down from thousands upon thousands of stocks to a list of 133.

A Manageable Dividend Payout Ratio

My first screen is to eliminate those companies with a dividend payout ratio of over 50%. A dividend payout ratio is,

the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company. It is the percentage of earnings paid to shareholders in dividends. The amount that is not paid to shareholders is retained by the company to pay off debt or to reinvest in core operations. It is sometimes simply referred to as the ‘payout ratio.’

The dividend payout ratio provides an indication of how much money a company is returning to shareholders versus how much it is keeping on hand to reinvest in growth, pay off debt, or add to cash reserves (retained earnings). 

https://www.investopedia.com/terms/d/dividendpayoutratio.asp

A Low Price to Free Cash Flow

I originally stated that I would be searching for Free Cash Flow Yield, however, the screening tool I used (and will continue to use), ThinkorSwim, has Price to Free Cash Flow so I will use that metric. Price to Free Cash Flow,

The price-to-cash flow (P/CF) ratio is a stock valuation indicator or multiple that measures the value of a stock’s price relative to its operating cash flow per share. The ratio uses operating cash flow which adds back non-cash expenses such as depreciation and amortization to net income. It is especially useful for valuing stocks that have positive cash flow but are not profitable because of large non-cash charges.

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The price-to-cash flow ratio measures how much cash a company generates relative to its stock price, rather than what it records in earnings relative to its stock price, as measured by the price-earnings ratio. The price-to-cash flow ratio is said to be a better investment valuation indicator than the price-earnings ratio, due to the fact that cash flows cannot be manipulated as easily as earnings, which are affected by depreciation and other non-cash items. Some companies appear unprofitable because of large, non-cash expenses even though they have positive cash flows.

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https://www.investopedia.com/terms/p/price-to-cash-flowratio.asp

March 2020 Dividend Growth Undervalued Watch List

After those two metric screens I was left with the following 13 stocks:

Acme United Corp.ACU
Ameriprise Financial Inc.AMP
Andersons Inc. (The)ANDE
Best Buy Corp.BBY
CenterPoint EnergyCNP
Donegal Group Inc. ADGICA
Hawkins Inc.HWKN
Landmark Bancorp Inc.LARK
Nu Skin Enterprises Inc.NUS
Bank OZKOZK
Ryder SystemR
Republic Bancorp KYRBCAA
Travelers CompaniesTRV

Almost every company on the list are new to me as they haven’t hit the 20 or 25 year mark yet, which means I am going to need a way to whittle it down a bit further before looking deep into the company. The secondary items below are going to change month to month depending on how many companies I have to look into.

First I wanted to test each company’s P/E:

Acme United Corp.ACU16.05
Ameriprise Financial Inc.AMP10.21
Andersons Inc. (The)ANDE33.61
Best Buy Corp.BBY13.74
CenterPoint EnergyCNP17.61
Donegal Group Inc. ADGICA8.7
Hawkins Inc.HWKN15.25
Landmark Bancorp Inc.LARK10.05
Nu Skin Enterprises Inc.NUS8.14
Bank OZKOZK7.69
Ryder SystemR#N/A
Republic Bancorp KYRBCAA8.45
Travelers CompaniesTRV12.89

Since I still have plenty of choices, I pulled up each company to see what industry they were in and two in particular caught my eye – ACME United (Distributions) and Hawkins (Chemicals). I do not have either of these industries anywhere in my current portfolio.

First I researched to make sure that their outstnading shares were flat for the past 5 years or so:

Since that didn’t eliminate one (or both), and given the volatility we have faced this month with 700+ swings in both directions for the dow, I decided to look at each company’s 1 month chart:

I like that ACU didn’t crumble that much during those rough days. So I have decided to buy a lot of that on 3/4/2020. I am going to keep my eye on HWKN, and if/when we have another huge bounce I am going to open a position in HWKN as well.

Acme United

Acme is an interesting purchase for me not because of what it does:

Acme United Corporation supplies cutting, measuring, and safety products for the school, home, office, and industrial markets. The Company produces shears, scissors, rulers, first aid kits, utility knives, manicure products, medical cutting instruments, guillotine paper trimmers, and pencil sharpeners. Acme United extends its products and services throughout global networks.

but because it is tiny and thinly traded. This may be the smallest company I have ever purchased.

At a market cap of $79,000,000 and 435 employees it is basically a large-small business. I am kind of excited that this pushing the boundaries of where I am used to investing in.

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