Screening for Undervalued Dividend Growth Stocks – March 2018

///Screening for Undervalued Dividend Growth Stocks – March 2018

Screening for Undervalued Dividend Growth Stocks – March 2018

These screens have been happening deeper and deeper into the month, I think I’ll have to change that going forward.  Notwithstanding my (self imposed) tardiness, I finally finished my screening process to provide me with a watch list of undervalued dividend growth stocks.  As a reminder, almost every single month for the past few years I created a screen to buy a lot or two (a lot being $500) of a company that has increased their dividend for at least 25 years (using the dividend champion and dividend contender lists).  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.  My current screening metrics are outlined in detail below.

Thoughts before the screen: I am not entirely sure what to expect in terms of an outcome.  The broad market has recently been hit so I may get a few more companies to take a look at which may be nice.

My Screening Metrics

This is the third 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 166 companies (it was 165 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.

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 March 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 14!  Last month I had 11 to choose from.

So what Companies am I looking to Buy?

NameSymbolPrice to EarningsPE IndustryPayout RatioROEROE IndustryP/BP/B Industry
AFLAC Inc.AFL7.8813.2515%21.1410.161.461.18
Archer Daniels MidlandADM15.4920.6946%9.118.321.311.7
Arrow Financial Corp.AROW16.4615.2747%12.188.441.941.24
AT&T Inc.T7.7418.3841%23.17.211.612.17
Chesapeake Financial SharesCPKF14.5615.2718%10.398.441.431.24
Cincinnati FinancialCINF11.9417.2732%13.958.751.491.43
Computer Services Inc.CSVI19.0527.6150%19.146.143.533.25
Consolidated EdisonED15.5316.7656%10.888.591.551.59
Eagle Financial ServicesEFSI14.3815.2739%9.488.481.331.24
J.M. Smucker Co.SJM11.2920.6928%17.528.321.831.7
Matthews InternationalMATW16.6918.2623%13.3110.712.042.22
NACCO IndustriesNC9.0420.3424%13.767.591.261.72
Old Republic InternationalORI11.1911.6940%12.0910.531.191.25
Weyco Group Inc.WEYS20.3720.3854%8.37.591.671.72

There are some familiar names and some companies that I have never seen come through the screen before.

Anyone have any feelings/thoughts/projections about the above companies?

By |2018-06-26T20:59:00+00:00March 22nd, 2018|Dividend Investment Portfolio|0 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

Leave A Comment