Every month I take those stocks that have increased their dividends for 20+ years and manually screen them to create a watch list for my monthly purchase.  My goal is to find possibly undervalued companies that have paid an increasing dividend for two or more decades.  Even before the arduous task I knew that my watch list was going to be short, with the broad market at an all time high it has to mean that price to earnings ratios will be high and yields will be low.  Having a short list doesn’t bother me at all – it just makes it easier to choose my lot to buy this month.

Applying my Valuation Metrics to Dividend Growth Stocks

All my data comes from a snap shot in time (I did the research on September 7, 2016) and all metrics come 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 37! Last month it was 38.

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 37 remaining equities to 30:

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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This took us down to 25:

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 2.0% (same as the past few months).  This eliminated 9 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.  I was happily surprised that this only eliminated 4 stocks

Dividend Growth Stock Watch List August 2016

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

  • AFLAC Inc. AFL
  • Chesapeake Financial Shares CPKF
  • Community Trust Banc. CTBI
  • Eagle Financial Services EFSI
  • First Financial Corp. THFF
  • T. Rowe Price Group TROW
  • Target Corp. TGT
  • UGI Corp. UGI
  • Wal-Mart Stores Inc. WMT
  • Northeast Indiana Bancorp NIDB
  • McGrath Rentcorp MGRC

I then compare these companies’ current price with their 52 week high and low.  I don’t always follow it, but I like the idea that there is a built in additional safety buying closer to the 52 week low.

Anyone like a particular company in the list?

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