Every month I create a watch list of dividend growth stocks that may be undervalued according to my methodology (defined below).  My first step is to eliminate 99% of the publicly traded market and focus on those stocks have increased their dividend payments for 20+ years.  I use the Dividend Champion List and Dividend Contender list.  This month I am starting with 159 equities, and it is at this point, I start screening for individual metrics.

Applying my Valuation Metrics to Dividend Growth Stocks

All my data comes from a snap shot in time (this post was written on Sunday June 5, 2016) taken 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

This particular month applying this screen I went from 159 equities to 42! Indicating a pretty frothy market out there.

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.

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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 42 remaining equities to 33 remaining companies to look at.

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,

price-to-book ratio (P/B Ratio) is a ratio used to compare a stock’s market value to its book value.

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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

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Shockingly, this only eliminated two stocks:

Yield Elimination

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% which eliminated 15 more companies:

Payout Ratio

Last, but certainly not least, we have the payout ratio.  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.  Again, I was shocked to only eliminate 3 stocks

Dividend Growth Stock Watch List June 2016

The above screen (which I did by hand) leaves me with the following stocks to watch:

  • Cincinnati Financial CINF
  • Community Trust Banc. CTBI
  • Computer Services Inc. CSVI
  • Dover Corp. DOV
  • Eagle Financial Services EFSI
  • First Financial Corp. THFF
  • T. Rowe Price Group TROW
  • Target Corp. TGT
  • Wal-Mart Stores Inc. WMT
  • Northeast Indiana Bancorp NIDB
  • Arrow Financial Corp. AROW
  • Chesapeake Financial Shares CPKF
  • Meredith Corp. MDP

 

Anyone have any particular feelings about the companies? or my process?

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