After finishing The Acquirer’s Multiple book by Tobias Carlisle, I decided that I wanted to give the valuation method a chance.  It takes a bit of a different spin on valuation than what I had been used to.  It moves away from using price as a cornerstone (i.e. does not look at price to earnings, price to book, price to etc.) and takes a look at balance sheet and earnings.  It seemed like a very interesting take on the same desire to buy a $1 for .50 cents.  After some research I figured out that running the screen for the Acquirer’s Multiple seemed damn near impossible for a person who wasn’t doing it for their profession, and since I wasn’t willing to pay for the screen it seems that I have moved towards a very similar idea called the Magic Formula (described in detail below).  For future screens I am not sure how I got to the magic formula will be necessary.

It should be mentioned that I am not getting away from my desire to build a future dividend income stream, and as such, everything I did was going to have the dividend champion and contender list in the background.

What is the Magic Formula’s Goal

Developed by famed value investor Joel Greenblatt, the Magic Formula,

is a quant screen…that identifies great companies selling at a discount. The process is simple. To identify great companies Greenblatt screens for companies with a high return on invested capital (ROIC). And to identify companies that are “cheap” Greenblatt uses the company’s earnings yield.

The formula is basically Enterprise Value/EBIT.  This differs from the Acquirer’s Multiple insofar as Mr. Carlisle uses a different denominator.  Mr. Carlisle uses a different version of ‘earnings’ by looking at different variables.

In addition to the screen, the magic formula removes financial and utility firms.  Considering how heavy I am in both sectors, I am happy to ignore both categories for the next six to 12 months.

How Did I Screen for the Magic Formula?

After way longer than I’d like to admit I found an amazing, free site to easily screen for EV/EBITDA (rather than EBIT).  The site is called FinBox and I would highly recommend it for anyone that is trying to screen for almost anything.  The EV/EBIT is a premium feature on the site, and I may opt to sign up for the service in the future, but right now, I am just learning about this method of valuing companies.

My June 20108 Dividend Growth Watch List

So after screening for those companies with a magic formula of less than 10, and a dividend yield of at least .01%, I was left with approximately 600 companies.  Separately, there were about 165 companies that have increased their dividend at least 20 years.  When we cross referenced the two lists I ended up with only 20 companies! Respecting the removal of financial and utilities from the formula I am left with the following companies to purchase in June:

  • ADM – Archer Daniels
  • T – AT&T
  • CVX – Chevron
  • XOM – Exxon
  • NC – NACCO
  • NUE – Nucor
  • SCL – Stepan Companies
  • TGT – Target
  • TDS – Telephone and Data Systems
  • UVV – Universal Corporation
  • WBA – Walgreens
  • WMT – Walmart
  • CAH – Cardinal Health Care
  • BPL – Buckeye
  • ENB – Enbridge

I’d love to hear any thoughts on the Magic Formula, or any of the companies that I ended up with on my watch list