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.
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,
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
Shockingly, this only eliminated two stocks:
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:
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?