Archive for the ‘Dividend Stocks’ Category

Dividend Growth Stocks for a Low Price Return Stock Market

Friday, December 18th, 2015
  • ACE, ADP, Microsoft and Raytheon look to us to be attractive long-term dividend growth investments; and they have been so in the long-term and short-term past
  • High quality, low leverage stocks with long histories of persistent dividend payment and growth are important in the low forward price return US stock market expected for the next few years
  • Free cash flow is to be prized in stock selection when thinking about weathering storms
  • Stocks that have paid and increased dividends though multiple recessions could help investors sleep on those investments

Most analysts agree that total return for US stocks over the next few years will be modest.  When expected price returns are high, dividend yield takes a back seat for many investors (not necessarily conservative or retired investors), because of their low contribution to total return.  When expected price returns are modest or low (as they are now), dividends get up in the front seat, and maybe even the driver’s seat.

It seems to us that at least for a good part of a portfolio for retirees and near-term pre-retirees, dividends should be in the front seat.  That is not necessarily something for younger investors with at least, say, 10 years before retirement; and who are still in the earning and asset accumulation stage of their financial lives.

So this investment note is probably more suitable for the retiree or near-term retiree crowd (or any other investor who for whatever reason is attracted to dividend stocks).  And this note is not about reaching for yield.  It is about finding high quality, steady dividend growth companies, that have weathered the test of time; and up and down markets.

We always begin our search for opportunity with a quantitative filter.  We think you really have to do that, unless you rely in tips on TV, radio or investment media — something that will not expose you to the full range of possibly good ideas. And, more importantly, such tips will seldom give you much depth — but you can research them to see if they work for you if that is your cup of tea.

I suppose you could say this article also a tip, but we think its different.  It is different, in great part, because we take you through the steps of how we got to our conclusion, so you have the basis to make your own evaluation, and to determine what additional research you need to do for your self if any of the ideas here seem potentially attractive.

There are thousands of ways to set up a filter with different criteria categories and different parameters within the categories; and we use several different filters to generate ideas.  This is just one filter, not the only filter than makes sense to us.

There are over 8,000 listed securities on the NYSE, NASDAQ and AMEX.  Nobody can review them all, so a filter reduces the size of the universe to examine.  Our preliminary quantitative filter yesterday reduced 8,000+ securities to a list of 15.   Here is how we go those 15.

FILTER CRITERIA:

  • Dividend Growth Consistency: Paid and increased dividends for at least 8 years (through 2008-2009 market crash)
  • Dividend Growth Rate: minimum 3% annualized over 1, 3, and 5 years
  • Current Yield: >= 2%
  • Trailing Payout Ratio:  less than 100% (except for REITs or MLPs)
  • Debt-to-Equity: maximum 2
  • PEG Ratio: > 0 and < 3
  • 8-Year Price Change: better than zero (traverses last recession)
  • 1-Year Price Change:  better than negative 5%
  • Liquidity: 3-month average per minute trading volume is at least $10,000
  • Quality Rating: by at least one of Value Line, Standard & Poor’s, MSCI or Wright Investors’ Services
  • Consensus 12-mo Target Price/Market Price: >=1

FILTER RESULTS:

This table lists the 15 filter survivors, along with their sector and industry.

(click image to enlarge)

best15-2015-12-17

We are concerned these days about free cash flow, that could be helpful if there is margin compression due to a sales slump, increased interest costs, or some other adverse development.  Because of that concern, we visually examined free cash flow charts for the 15 filter survivors and found 6 stocks with a nice enough year-by-year pattern and enough total free cash flow to give us some comfort.  Their charts are shown below, also presenting their price, their revenue and their dividend.

VISUAL CHART SELECTION

Of the 15 filter survivors, 6 look best after reviewing charts of free cash flow.

Declining revenue at LEG is unattractive.  Declining revenue at RTN is much less concerning, because it was based on defense sequester, which will end; and most importantly RTN’s critical role in weapons systems for the war with ISIS.

2015-12-17_ ACE 2015-12-17_ ADP 2015-12-17_ LEG 2015-12-17_ MSFT 2015-12-17_ RTN 2015-12-17_ SJM

Also because of concerns about a tepid global economy, we would currently favor quality stocks more than usual as an extra level of comfort in the event that things go poorly in the markets.  This table shows the quality ratings for the 6 stocks remaining in our filter.

QUALITY RATINGS

2015-12-17_guality

A synopsis of how the firms describe their rating goes like this:

  • S&P Capital IQ Earnings & Dividend Rank: Growth and stability of earnings and dividends
  • Value Line Financial Strength Rating: balance sheet leverage, business risk, the level and direction of profits, cash flow, earned returns, cash, corporate size, stock price, cash on hand, and net of debt
  • MSCI Quality Index: Durable business models with sustainable competitive advantage; high ROE, stable earnings with low business cycle correlation, and  strong balance sheets with low leverage.
  • Wright Investors’ Service Quality Rating: (1) Liquidity, (2) Financial Strength, (3) Profitability & Stability, and (4) Growth. The ratings are based on 32 factors (8 for each of the four rating elements) using 5-6 years of corporate records and other investment data. The highest possible score is AAA20.  The lowest possible score excluding certain designations for insufficient information or time frame, is CCC0.  They consider the minimum rating for “quality” to be BBB4.

By these ratings, MSFT is clearly best and SJM is probably worst.

The Street (mostly Sell-Side firms) publish their 1-year forward price targets.  The graphics that follow present the composite Street view of each of the 6 stocks.

STREET ESTIMATES:

Looking at the analyst estimates, LEG looks least attractive.  ADP looks most attractive to the Street consensus

2015-12-17_Consensus_ACE 2015-12-17_Consensus_ADP 2015-12-17_Consensus_LEG 2015-12-17_Consensus_MSFT 2015-12-17_Consensus_RTN 2015-12-17_Consensus_SJM

 

INDEPENDENT ANALYST RATINGS:

Two leading independent analytics services are Standard and Poor’s Capital IQ and Value Line.  They approach the matter of rating differently.  S&P is more qualitative and Value Line is more quantitative.  They sometimes agree and often do not.  An example here is on ADP where they are as far apart as they can possibly be, with S&P saying stay away and Value Line saying jump on board.

Fidelity publishes the view of a variety of mostly independent analysts, and then Reuters uses a proprietary weighting system to come up with a single score from 0-10 called StarMine.  They weight the analyst opinions based on the historical accuracy of each analyst firm for the sector in which the stock they are rating belongs.

S&P Capital IQ uses a 1-5 rating system, where 5 is best and 1 is worst (Stars are for year ahead return, and Fair Value is market price versus the S&P view of fair value).  Value line uses a rating system from 1-5, where 1 is best and 5 is worst (their Earnings Predictability is a relative measure of the reliability of earnings forecasts).

Here is how each service rated each of our 6 selections.

By these three services, LEG looks better than in the Street consensus and ADP looks worst, based on S&P giving ADP an outright Sell  and a most overvalued price versus Fair Value.  ACE is clearly on top according to these sources.

2015-12-17_ratings

 

SELECTED FINANCIAL DATA:

Nothing beats reading the full SEC filings, and studying the full set of financial statements and footnotes.  That said a summary look at selected financial data can focus attention on a stock or divert attention elsewhere.

The first table presents absolute Dollar amounts (in $millions) for selected financial data.  The second table presents the same data on a common size basis (each data point expressed as a percentage of sales).

2015-12-17_SelecrtedData

2015-12-17_commonsize

MSFT has the best EBITDA margin, but apparently pays more tax, because it has the same net income ratio as ACE and ADP which have lower EBITDA margins.  The all have good Current Ratios (MSFT the best).  SJM has a negative tangible equity, because its intangibles exceed its book equity.

GROWTH RATES:

LEG is the weakest in overall growth rates.

ACE seems to be the most consistent average to above average performer, and may benefit most by rising interest rates.

MSFT has been weak on EPS growth, but strong on sales and dividend growth.  They have the resources to keep the dividends coming, and their negative EPS has been significantly impacted by write-downs of discontinued businesses, which may not be as problematic going forward.

RTN has poor historical revenue growth, but restocking and development of the US high-tech weaponry arsenal is likely, and they would be a direct beneficiary.

SJM has had earnings growth problems (as has LEG), but has kept dividends growing nicely, and they have some product lines with strong brand equity that should carry them forward (e.g. Smuckers jellies and jams, Jiff peanut butter, Pillsbury, Folgers coffee, Kibbles n’Bits and 9Lives cat food)

2015-12-17_growth

A really important point for us at this juncture in this time of expected low price returns and high importance of dividend return (and for the needs or our mostly near retirement and retired clients), is the persistence and growth of dividends through difficult times.

Each stock in this list of 6 has paid and increased dividends for at least 11 years (RTN) and as long as 44 years (LEG).  To put those long periods into more functional perspective, we looked up all of the recessions in the last 44 years and counted how many recessions each stock lived through while paying and increasing their dividend.

The more recessions they weathered, the more likely they are, we think, to weather the next one.  If a retiree can count on the dividend, even if the stock price is gyrating (particularly if the retiree can live on the income from the portfolio alone), the more the retiree can sleep at night, and be less concerned about the price of the stock in short periods of a year or two.

LEG persisted with dividend growth through 7 recessions — pretty impressive.  ADP persisted through 6 recessions — also pretty impressive.

Just because a stock persisted through fewer recessions is not necessarily a ding on performance, because they may not have existed at all of those times.  MSFT is an example of that.

Lastly for growth, we engaged in an entirely hypothetical calculation just to possibly provide some scope of future dividend payback of the original purchase price.  These calculations should not be relied upon, just reflected upon.

We projected the 7 years historical dividend growth rate forward 7 years; then the 5-year history out 5 years; then the 3-year history out 3 years to see how much of the purchase price might be recovered before a possible sale of the stock at the end of those periods.

Then we projected out 5 years again using the average of the 7, 5 and 3 year dividend growth rates; and once more using only the minimum growth rate among the 7, 5 and 3 years rates.

By those calculations MSFT looks best and SJM works, and none are bad.

BUSINESS DESCRIPTIONS:

Most of you probably have a reasonable idea what most of the 6 stock do, but here are business descriptions to paint a possibly fuller picture of each company’s business.

ACE: ACE Limited is a holding company. The Company is a global insurance and reinsurance company. The Company offers commercial insurance products and service offerings, such as risk management programs, loss control and engineering and complex claims management. It provides specialized insurance products to niche areas, such as aviation and energy. It also offers personal lines insurance coverage, including homeowners, automobile, valuables, umbrella liability and recreational marine products. In addition, it supplies personal accident, supplemental health and life insurance to individuals in select countries. The Company’s segments include Insurance – North American P&C, Insurance – North American Agriculture, Insurance – Overseas General, Global Reinsurance and Life.

ADP: Automatic Data Processing, Inc. (ADP) is a provider of human capital management (HCM) solutions and business process outsourcing. The Company operates through two segments: Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled HCM solutions. These offerings include payroll services, benefits administration, recruiting and talent management, human resources management, insurance services, retirement services and payment and compliance solutions. The Company’s PEO business, ADP TotalSource, offers small and mid-sized businesses human resources (HR) outsourcing solution through a co-employment model. ADP TotalSource includes HR management and employee benefits functions, including HR administration, employee benefits and employer liability management, into a single-source solution, including HR administration, employee benefits and employer liability management.

LEG: Leggett & Platt, Incorporated is a manufacturer that conceives, designs and produces a range of engineered components and products found in homes, offices, automobiles and commercial aircraft. The Company operates in four segments: Residential Furnishings segment, which manufactures steel coiled bedsprings; Commercial Fixturing & Components segment, which include work furniture group that designs, manufactures, and distributes a range of engineered components and products primarily for the office seating market; Industrial Materials segment consists of wire group, which operates a steel rod mill and tubing group, which supplies welded steel tubing and Specialized Products segment designs, manufactures and sells products, including automotive seating components, specialized machinery and equipment, and service van interiors. Its brands include Semi-Flex, ComfortCore, Mira-Coil, Lura-Flex, Superlastic, Super Sagless, Tack & Jump, Schukra, Gribetz, Masterack and Hanes, among others.

MSFT: Microsoft Corporation is engaged in developing, licensing and supporting a range of software products and services. The Company also designs and sells hardware, and delivers online advertising to the customers. The Company operates in five segments: Devices and Consumer (D&C) Licensing, D&C Hardware, D&C Other, Commercial Licensing, and Commercial Other. The Company’s products include operating systems for computing devices, servers, phones, and other intelligent devices; server applications for distributed computing environments; productivity applications; business solution applications; desktop and server management tools; software development tools; video games; and online advertising. It also offers cloud-based solutions that provide customers with software, services and content over the Internet by way of shared computing resources located in centralized data centers. It provides consulting and product and solution support services.

RTN: Raytheon Company, together with its subsidiaries, is a technology Company that specializes in defense and other Government markets. The Company develops products, services and solutions in markets: sensing; effects; command, control, communications and intelligence (C3I); and mission support, as well as cyber and information security. The Company operates in four segments: Integrated Defense Systems (IDS); Intelligence, Information and Services; Missile Systems, and Space and Airborne Systems. The Company serves both domestic and international customers, as both a prime contractor and subcontractor on a portfolio of defense and related programs primarily for Government customers. The Company’s products include Global Integrated Sensors, Integrated Air & Missile Defense, Cybersecurity and Special Missions, Global Training Solutions, Land Warfare Systems, Advanced Missile Systems, Tactical Airborne Systems, Advanced Missile Systems and Electronic Warfare Systems.

SJM: The J. M. Smucker Company is a manufacturer and marketer of consumer food and beverage products and pet food and pet snacks in North America. The Company has four segments: U.S. Retail Coffee, U.S. Retail Consumer Foods, U.S. Retail Pet Foods, and International, Foodservice and Natural Foods. The Company’s U.S. retail market segments consist of the sale of branded food products to consumers through retail outlets in North America. The Company’s International, Foodservice and Natural Foods segment represents sales outside of the U.S. retail market segments. The Company’s principal consumer food and beverage products are coffee, peanut butter, fruit spreads, shortening and oils, baking mixes and ready-to-spread frostings, canned milk, flour and baking ingredients, juices and beverages, frozen sandwiches, toppings, syrups, pickles, condiments, grain products and nut mix products. The Company’s pet products consist of dry and wet dog food, dry and wet cat food, dog snacks and cat snacks.

OUR CHOICES:

We own ACE, ADP and RTN; are thinking about MSFT, which we have owned in the past.

  • ACE as an insurance company will probably benefit by interest rates as they rise
  • ADP will benefit by an improving jobs picture, and ever more complex benefits and HR issues
  • RTN will benefit by the increasing reliance of high-tech warfare, and the current war with ISIS
  • MSFT is coming back with its Windows 10 system, its own computer brand, and cloud platform (and a new and better CEO)

This note was written on Wednesday December 16, 2015.  The following charts were generated at end-of-day Friday December 18, 2015.

PERFORMANCE COMPARISON CHARTS

These chars plot the dividend adjusted percentage performance of each of the 6 stocks versus an S&P 500 ETF (in black).

10 Years Monthly

2015-12-18_10yr-a

2015-12-18_10yr-b

3 Years Weekly

2015-12-18_3yr-a

2015-12-18_3yr-b

 

3 Months Daily

2015-12-18_3mo-a

2015-12-18_3mo-b

13 Dividend Stocks Passing Rigorous Quality, Growth and Valuation Filter

Wednesday, October 7th, 2015
  • Only 13 dividend stocks passed basic filter criteria out of the hundreds in the Dividend Champions and Contenders in Dave Fish’s valuable lists
  • Most of those stocks are rated negatively from a technical perspective
  • Only 1 stock passed all the filter criteria and is also rated positively technically

In search of high quality dividend stocks, we performed this basic filter on Sunday October 4, 2015, and found only 13 prospects, most of which are not attractive in terms of current price behavior, but which may have long-term appeal:

  • Using David Fish’s dividend stocks lists, the stocks had to have paid and increased dividends for at least 10 years, and the dividend growth rate for 1, 3, 5 and 10 years each had to be at least 2%.
  • Using Wright’s quality ratings, the stocks had to be rated A or B for “investor acceptance”, A or B for “financial strength”, A or B for “profitability and stability”, and at least 4 on a 20 point scale for “growth” (each of the four dimensions based on eight parameters)
  • Using Standard & Poor’s Capital IQ ratings, the stocks had to be rated at least 3 on a 5 point scale for year ahead performance, and at least 3 on a 5 point scale for fair value pricing.
  • Using Fidelity’s equity summary score, the stocks had to be rated neutral or better (>3.1 on a 10 point scale)
  •  Using Street Consensus data, the stocks had to have a positive PEG that is 2.0 or less; and a 12-month target price that is at least 5% above the current price
  • The current yield must have been at least 2%.

Out of the thousands of listed stocks, and the hundreds of stocks in Fish’s lists, and the hundreds of stocks with high Wright’s quality ratings, only 13 passed those filter criteria — and most of those right now, like the overall market, have negative technical ratings.

  • (EV) Eaton Vance
  • (TROW)  T. Rowe Price Group
  • (ACE) Ace Limited
  • (UTX) United Technologies
  • (IBM) International Business Machines
  • (CAH) Cardinal Health
  • (CHRW) C.H. Robinson Worldwide
  • (FAST) Fastenal
  • (GPS) The Gap
  • (CSX) CSX Corporation
  • (TRV) The Travelers Companies
  • (CMI) Cummins
  • (CR) Crane Company

Only 1 stock was also positively rated technically — C.H. Robinson Worldwide (CHRW).

Its business is described on the Wright’s side as:

“C.H. Robinson Worldwide, Inc. is a third party logistics company. The Company provides freight transportation services and logistics solutions to companies of all sizes, in a variety of industries. The Company operates through a network of 281 offices in North America, Europe, Asia and South America. It has developed global transportation and distribution networks to provide transportation and supply chain services worldwide. It also provides sourcing services through Robinson Fresh. Sourcing business involves the buying, selling and marketing of fresh fruits, vegetables, and other perishable items. The Company supplies fresh produce through its network of independent produce growers and suppliers. Its customers include grocery retailers and restaurants, produce wholesalers and foodservice distributors. It also arranges the logistics and transportation of the products it sells and provides related supply chain services, such as replenishment, category management and merchandising.”

We already own a few of the stocks and have for a while: Travelers, Cummins, United Technologies, and T. Rowe Price.

Here are some tables showing attributes of each stock:

This table shows the Wright’s quality ratings, the S&P Cap IQ rating, the Fidelity equity summary score, the Barchart technical rating and the StockCharts technical rating:

2015-10-05_ratings

IA is for Investor Acceptance
FS is for Financial Strength
PS is for Profitability and Stability
GR is for Growth
SP* is for S&P year ahead total return relative to the market
SP FV is for S&P Fair Value
SM is for Fidelity equity summary score
The rating from StockCharts is on a 100 point scale

This table shows the name and the number of years the stock consecutively paid and increased dividends without interruption; the payout ratio and the current yield.

2015-10-05_select1
This table shows the annualized dividend growth rate over the last 1, 3, 5, and 10 years:

2015-10-05_select2

This table shows the fundamental valuation of the stocks:  Price-to-Book, Price-to-Sales, trailing Price-to-Earnings, forward Price-to-Earnings, PEG ratio, and 12-month forward street consensus target price divided by the current price:

2015-10-05_select4

This chart summarizes some basic technical information: price to 200-day average, 50-day average to 200-day average, the position of the price within the 52-week high to low range, the 12-month target price to the 200-day average, and the short ratio (number of days to cover the total short position at the average trading volume rate):

2015-10-05_select5

The following charts from YCharts.com, each chart for an individual stock, show a normalized 10-year history of price, revenue, cash from operations, dividends, and debt to equity:

ace cah chrw cmi cr csx ev fast gps ibm trow trv utx

There should be enough for do-it-yourself dividend investors to chew on here, as they go to the next level of due diligence and personal suitability review.

We find the low number of stocks that passed our filter to be one indication that the market may be overpriced, and vulnerable to further correction. We would have expected a larger number stocks to pass, but so many had too high PEG ratios, too low yields and too low forward price change estimates, that the list withered to a small number very quickly.

5-Yr Projection of Mean Reversion for S&P 500 Price, GAAP Earnings and Dividends

Monday, July 28th, 2014

One approach to seeking fair value, or simply what is most likely, over the intermediate-term to long-term is the assumption of mean reversion.  That approach basically assumes that long-term means act a bit like gravity or a magnetic attraction that pulls on prices, earnings or dividends to return to the mean growth level.

It may take a lot of patience for that approach, and if there is a permanent structural change in markets, the former mean may not continue to serve as gravitational or magnetic attraction.   On the other hand structural changes are few and far between, making mean reversion a pretty good bet more often that not.

So, lets discover the long-term means for S&P 500 prices, GAAP earnings and dividends; and then apply those means to make reasonable 5-year projections of those dimensions into the future.

Let’s use the S&P monthly data available from Professor Shiller at Yale (you can download the data for yourself to do various studies on your own).  That data begins in the 1800’s using precursors to the S&P 500, such as the Dow Industrials and other data, but we will confine our study to actual S&P 500 data from its inception in 1957 (more than 57 years of data).

LONG-TERM PRICE

The long-term compound growth rate of the price of the S&P 500 is 6.88%.  Continuing that growth curve out 5 years comes up with a future  price projection in the vicinity of 2700.  That is around 36% to 37% above the current level.

Projection1

LONG-TERM GAAP EARNINGS

The long-term compound growth rate of the GAAP earnings for the S&P 500 is 5.90%.  Continuing that growth out 5 years comes up with a future earnings level projection in the vicinity of $115 per index share. That is around 14% above the most recent 2-month trailing earnings levels.

Projection2

LONG-TERM DIVIDENDS

The long-term compound growth rate of dividends for the S&P 500 is 5.37%.  Continuing that growth out 5 years comes up with a future earnings level projection in the vicinity of $45 per index share.  That is around 20% above the most recent 12-month  trailing dividend level.

Projection3

PROJECTION IN THE INTERNET ERA

Now let’s look at the growth trends since the effective beginning of the internet era in 1995, and also use the long-term growth factors from that beginning to see where that ends up.

In 1995, HTML had been around for a few years, and eventually it included ways to add images, not just text. That image capability was added and expanded to browser capability when Mark Andreesen released the Netscape browser in November 1994.  The internet rapidly transformed from a Geeky academic and military technology, to a personal and commercial technology.  It has been disruptive and transformative in business and for stocks ever since.

Keep in mind that if January of 1995 was particularly high or low relative to fair value, the projection would be comparably high or low.  For reference and to make your own judgment about that, here are the multiples at as of December 30, 1994:

  • GAAP earnings yield 5.95% (P/E ratio 18.81)
  • Dividend yield 2.90%
  • Moody’s long-term Baa corporate bonds 9.1%
  • 30-yr Treasuries 7.89%
  • 10-yr Treasuries 7.81%
  • 5-year Treasuries 7.81%
  • 2-yr Treasures 7.69%
  • 3-mo Treasuries 5.6%

The yield curve was essentially flat, while today it is steep. and the Fed was not such an intrusive player.

INTERNET ERA S&P 500 PRICE

These charts have two 5-year projections.  The black dotted plot is a simple exponential trendline on the data from the beginning of 1995 projected out 5 years.  The red solid line is a projection from the beginning of 1995 at the long-term growth rate of the price of the S&P 500.

The exponential trend line is heavily influenced by the extremes of the dot-com bubble, while the long-term growth rate projection is impacted by the degree of “normalcy” of the starting point multiple.

The exponential projection suggests there is little if any price growth in the 5-year future of the S&P 500.  The long-term growth rate applied to the internet era suggests a price level 5 years out in the vicinity of 2900, or about 31% to 32% cumulative price change over the next 5 years.

At a minimum, the explosive growth of the past few years driven by both earnings recovery from the deep 2008 crisis, and by P/E multiple expansion.  Those forces are behind us, not in front of us.

Projection4

There are many optimists among the analyst community, and there are long-term optimists who expect a correction, but there is a much more limited number of outright long-term pessimists.

Two prominent pessimists are Bill Gross of PIMCO and Jeremy Grantham of GMO.

  • PIMCO, as you may know, is predicting stock price appreciation in the 3% to 5% range over the next several years.
  • GMO is another important voice expressing concerns. Their quarterly asset class 7-year forecast is for negative 1.7% rate of return for US large-cap stocks (essentially the S&P 500), negative 5.2% return for small-cap stocks (essentially the Russell 2000), and positive 2.8% for high quality stocks. They see positive 3.6% returns for emerging market stocks,

As to High Quality Stocks, we suspect for the most part GMO was thinking about large-cap stocks that have not participated fully in this momentum market, and which are particularly strong otherwise – such as with consistent but modest revenue and dividend growth, low leverage and strong Balance Sheets, and wide business moats.  See our post of high quality stocks.)

INTERNET ERA GAAP EARNINGS

The exponential trendline from the beginning of 1995 suggests earnings are already too high by about $10 per index share ($100 versus a 5-year projection of about $90).  Let’s hope that is not a good forecast, because the absolute level of earning and the associated negative growth rate would probably crush the stock market.

We do have historically high profit margins, historically low corporate borrowing costs, stagnant wages, above historical earnings growth rates, above average P/E multiples, and stock market capitalization that is at an historically high ratio to US GDP.  Those are key fundamental risk factors that should be evaluated.

The long-tern earnings growth rate applied to the earnings at the beginning of 1995 projected out 5 years, suggests earnings of about $122 per index share, or about 21% above current levels.

Standard & Poor‘s forecasts 2014 GAAP earnings of $119.87 (basically the 5-yr projection level at the long-term growth rate); and $136.39 for 2015.  The 3-year period leading up to the end of 2015 would have a compound earnings growth rate of 16.39% (about 2.5 times the long-term earnings growth rate).  They may be right, but if they are way wrong, there will be major market problems.

Projection5

INTERNET ERA DIVIDENDS

The exponential 5-year projection for S&P 500 dividends goes to about $40 per index share (about a cumulative 7% growth).  The long-term dividend growth rate applied from the beginning of 1995 suggests a 5-year projected cumulative growth of about 22% to about $46 per index share.

Projection6

On balance, we have a greater faith in the growth of dividends than in the growth of either earnings or index price.  We also share GMO’s prediction that high quality stocks will do better over the next few years than large-caps in general.  Additionally, our client basis is at or near the end of the accumulation stage of their financial lives, where assets cannot be replaced easily or at all from new wages or business profits.  That means asset preservation is key, further pushing us in the direction of dividend and high quality bias within the stocks allocation, along with some amount of allocation to partially market neutral assets, such as long/short funds or positions.

 

9 Dividend Stocks Passing a Difficult Filter

Wednesday, July 9th, 2014

You may find something of interest for yourself in this group of filtered dividend stocks.

We quantitatively filtered through David Fish’s Dividend Champions, Contenders, and Challengers list (“CCC list”) of 543 stocks that have paid and increased dividend for at least 5 years (some for several decades) to find those that may be currently most attractive.

Only 9 (less than 2%) passed our filters.

Here are the stocks, and then how we got them:

Baxter International Inc BAX Medical Instruments & Supplies
CMS Energy Corp CMS Utilities – Regulated Electric
DTE Energy Holding Co DTE Utilities – Regulated Electric
Energy Transfer Equity LP ETE Oil & Gas Midstream
Genuine Parts Co GPC Specialty Retail
Microchip Technology Inc MCHP Semiconductors
ONEOK Partners LP OKS Oil & Gas Midstream
Simon Property Group Inc SPG REIT – Retail
Western Gas Partners, LP WES Oil & Gas Midstream

Prior to this review, we owned BAX, GPC, OKS and ETE.  We don’t expect to invest in the others at this time. We find utilities as a category to be overvalued.

We used three different database tools to do the filter.

Filter Level 1 (258 of 543 of CCC stocks passed level 1):

[used yesterday’s end-of-day data]

  • minimum dollar volume per minute $25,000
  • price above 200-day simple moving average
  • linear regression slope of 200-day average positive
  • current 200-day average above level 10 days ago
  • price less than 2 (63-day) standard deviations above 200-day average

Filter Level 2 (showing successive reduction of the 258):

[used today’s end-of -day data]

  • Yield >= 2.5% (100 passed)
  • Consensus target price >= 1.05 times price (42 passed)
  • PEG ratio <3x (24 passed)
  • 50-day average > 200-day average (15 passed)

Filter Level 3 (showing successive reduction of the 15):

[used today’s end-of-day data]

  • 1-yr revenue growth rate >zero
  • 3-yr revenue growth rate > zero
  • 5-yr dividend growth rate >= 3%

Then we checked with the Wright’s ratings for Liquidity, Financial Strength, Profitability and Growth [explanation of rating scale here] and the Moody’s credit rating.

These are important types of data for dividend investors seeking long-term holdings.

We’d like to see investment grade for dividend stocks.  For Wright’s we would like to see BBB4 or better, and Baa or better from Moody’s.

Wright’s Moody’s
BAX ABA10 A3
CMS ACB7 Baa2
DTE ABC2 A3
ETE ADNN Ba2
GPC AAB10 n/a
MCHP AAB4 n/a
OKS ABB5 Baa2
SPG ADA5 A3
WES BBC7 Baa3

Next we looked up the year ahead rating for price behavior as rendered by ThomsonReuters StarMine through Fidelity (where over 7 is Bullish and 3 or less is Bearish).  We don’t put great stock these ratings, but is does feel moderately soothing to know if analysts look favorably.

StarMine
BAX 8.5
CMS 9.1
DTE 6.8
ETE 4.7
GPC 5.8
MCHP 8.7
OKS 4.2
SPG 3.8
WES 0.8

The we looked up the short-term technical rating of the 9 stocks as rendered by BarChart.com and StockCharts.com.  The BarChart data is self-evident in its meaning.  The StockCharts data is strong technically at 70 and above, and weak at 30 and below.

Technical ratings can be useful when deciding when to enter a position.

BarChart StockCharts
BAX 88% BUY 59.9
CMS 8% BUY 61.9
DTE 8% SELL 60.9
ETE 56% BUY n/a
GPC 80% BUY 51.6
MCHP 88% BUY 63.4
OKS 24% BUY 63.4
SPG 16% BUY 70.0
WES 32% BUY 86.0

Here is how those 9 stocks did versus the S&P 500 over the trailing 1 year:

1

23

 

 

 

 

Growth, Growth Growth

Sunday, August 4th, 2013

There is a good deal of concern these days about stalled revenue growth and implications for earnings, and possibly some dividends.

Consequently, it seems reasonable to pay special attention to stocks that have historical revenue growth equal to or greater than that of the S&P 500; and earnings and dividend growth equal to or greater than the S&P 500 or the market median; and that have a current yield greater than or equal to the S&P 500; and that have a PEG ratio less than or equal to that of the market median.

There are only 9 stocks that met the filter criteria we used. They are:

QUALCOMM ORD (QCOM)
BLACKROCK ORD (BLK)
TAL INTL ORD (TAL)
COMPUTER PROGRAMS AND SYSTEMS ORD (CPSI)
WADDELL REED FINANCIAL CL A ORD (WDR)
AMERIPRISE FINANCE ORD (AMP)
TUPPERWARE BRANDS ORD (TUP)
CH ROBINSON WORLDWIDE ORD (CHRW)
FOOT LOCKER ORD (FL)

Here are the specific filter criteria and the hurdle values we used. For projected earnings growth rates we required a minimum of 5%:

click any of the following images to enlarge

img_2403

The values for each stock for the filter criteria are:

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Here are the ratings issued for these stocks by Standard and Poor’s and by Wright Investor’s Service (click here for explanation of ratings scales):

ratings

These key valuation metrics are from Yahoo Finance:

Valuation

Here are 10 year charts for those stocks, showing the percent change of the price, revenue, earnings and dividends (source: YCharts.com):

QCOM

BLK

TAL

img_2408CPSI

WDR

img_2410AMP

Untitled

CHRW

FL

Here are the percentage price rate of change data for 5-days (1 week), 21-days (1 month), 63-days (1 quarter) and 252-days (1 year):

TechCheck2

This table shows several technical data points, as follows:

  • Z-score (# of standard deviations  of price from the 200-day moving average)
  • Price ratio to the 200-day moving average
  • 50-day average ratio to the 200-day average
  • % by which price trails 1-year high price
  • Position of the price within the 63-day price range
  • 14-day RSI indicator

We have shaded those Z-scores greater than +/-  2 standard deviations to indicate that those stocks are at a distance from their moving average that is unusual (justified strong trend, or overextended above or below the average with strong reversion risk).

TechCheck1

Here are the short term technical ratings from BarChart.com.  “Short-Term” relates to an evaluation time frame in the vicinity of 20-days.  “Medium-Term” relates to an evaluation time frame in the vicinity of 50 days.  “Long-Term” relates to an evaluation time frame in the vicinity of 100-days.

Barchart

The distance of the current prices from the “Street” estimates of 12-month price targets; and the number of analysts providing each rating from Strong Buy to Strong Sell are provided in this table:

Street

Yahoo Finance provides summary business descriptions, company web address, as well as physical address and phone number for each company at this URL (just substitute the symbol [displayed in red] in this URL for the company of interest to you):

http://finance.yahoo.com/q/pr?s=FL+Profile

Not all companies are likely to be of interest to you, but you may find this list an interesting point of departure for a more thorough examination of the stocks.

We currently own TUP.  For our own specific purposes and situation, we find BLK most interesting among the other stocks in this list.

 

This Month’s Story Stock (TUP)

Thursday, July 4th, 2013

Each month, we select one of the companies in our Rational Risk Equity Income Investor letter to be highlighted because of an appealing “story”.  This month (issue #22 covering the month ending June 2013) we look at:

Tupperware Brands Corporation (TUP)

TUP meets all of the Rational Risk Quantitative List criteria, and the Subjective List criteria (see methodology for each list here) and has an appealing story.

PRINCIPAL APPEAL  OF THE STORY:

Participation in European recovery and the rise of the consumer in emerging markets …

TUP is a United States company that generates about 90% of its revenue outside of the United states, and about 61% of its revenue in developing economies. TUP products are plastic storage, preparation and storage products and beauty/personal care brands and jewelry re sold in nearly 100 countries via parties by 2.8 independent sellers on a “direct-to-consumer” demonstration sales-party method.  TUP is profitable with free cash flow, and attractive yield and dividend growth, and positioned to benefit from eventual European economic recovery and positioned to benefit from continued growth in the size and income of the middle class in emerging markets.  As emerging markets endeavor to transition from heavy reliance on commodities and manufactured good export to more consumer based internal economies.   The company states that they have low penetration in Latin America, Asia and Eastern and Central Europe, providing significant growth potential.

A FEW INTERESTING FACTS:

TUP operates in nearly 100 countries, selling through an independent sales force that includes approximately 1,800 distributors, 86,000 managers and 2.8 million independent dealers worldwide, collectively conducting 22 million sales parties, on average one every 1.4 seconds. Approximately 40% of product sales are for third party sources, which reduces inventory costs.  The company has 13,000 employees, only 1,000 of whom are in the US.  It has about 50,000 stockholders.

[click images to enlarge]

GEOGRAPHIC SEGMENTS:

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img_2144

QUALITY RATINGS:

(see ratings definitions here)

  • Standard and Poor’s assigns a dividend and earnings quality rating of : A
  • Standard and Poor’s assigns a corporate credit rating of: BBB-
  • Moody’s assigns a senior unsecured debt credit rating of : Baa3 Stable
  • Wright Investor’s Service assigns a quality rating of: ABA15

Moody’s Comments On Reent Debt Issuance:

On Mach 6, 20013 TUP issued $200 million in debt maturing in 2021 under a revised leverage plan.  Moody’s said this:

“Tupperware’s announced on 29 January that its board of directors had approved a series of more aggressive financial policies including a 72% increase in its dividend and a new dividend payout target of 50% EPS from 33%. More importantly, the BOD approved a new leverage target (unadjusted) of 1.75 times, up from 1.5 times. Proceeds from today’s offering along with cash and cash flow will be used to fund additional share repurchases. 

To hit its revised target leverage, Tupperware plans to repurchase up to $400 million in shares in fiscal 2013 up from about $300 million in 2012 and about in line with the company’s 2011 repurchases. On a proforma basis, we project the company’s debt-to-EBITDA (including Moody’s standard analytic adjustments) will increase to 2.5 times as compared with approximately 2.0 times at December 31, 2012. Given our expectations for cash flow from operations, capital spending and the revised dividend payout ratio, we expect share repurchases above $125 million will increase the company’s leverage. We expect Tupperware to scale back its share repurchases if organic growth slows below its 5% to 7% target or if profitability declines below its return on sales target of 14.3% to 14.4%. 

Despite the reduction in financial flexibility as a result of its more shareholder oriented financial policies, Tupperware’s Baa3 senior unsecured rating and stable outlook remains appropriate given the still strong profitability, organic growth rate and considerable global franchise strength its direct selling business commands. 

The stable outlook reflects our expectation that Tupperware’s revenues and earnings will continue to achieve above-average organic growth relative to other consumer products companies, consistently generate free cash flow and maintain strong, investment grade credit metrics.”

RANKINGS vs OTHER STOCKS AVAILABLE IN TH USA:

  • Sales: #1,104
  • Assets: #1,828
  • Mkt-Cap: #993

REVENUE, EBITDA and FREE CASH FLOW:

img_2141

EARNINGS and DIVIDENDS:

img_2142

Cash Conversion Cycle and Receivables Turnover

Cash conversion cycle is number of days to turn inventory to cash.  Receivables turnover is net credit sales divided by average accounts receivable.

img_2149

Profit Margin, ROE and ROA

img_2150

Quarterly Operating Statement

img_2154

 

Quarterly Balance Statements

img_2157

 

Quarterly Sources & uses Statements

img_2158

 

VALUATION MULTIPLES:

img_2143

PERFORMANCE vs WORLD STOCKS, DM STOCKS, and EM STOCKS:

The charts use these symbols: world stocks (VT), non-US developed market stocks (VEA) and emerging market stocks (VWO).

TUP has outperformed EM stocks over 3-months, 1-year and since the US stock market bottom in March of 2009.  TUP has underperformed US stocks by 4.69% over the past 3 months, approximately broken even with other developed market stocks over thee months, and underperformed total world stocks by about 1%

Daily for 3 months

TUP_day

Weekly for 1 year

TUP_wk

Monthly since US market bottom March 2009

TUP_mo

ANALYST OPINIONS:

Current Opinions

img_2161

Historical Price vs Historical Opinions

img_2162

DISCLOSURE:

We own TUP in some accounts.