February 2018 Dividend Growth Undervalued Watch List

First thing is first, I start with the publicly traded companies that have increased their dividend for at least twenty years.  This means that even in the middle of the dot com bust and the great recession their dividends increased.  This initial list is 165 companies (it was 162 last month).

Price to Earnings

Next, I remove all those stocks that have a price to earnings ratio either above 20 or that have a P/E that is more than their industry average.

Payout Ratio

Then, I remove all those companies that use more than 60% of their income to pay out the dividend.  I do not want my purchases to have to cut their dividend anytime soon.  Just because a company increased their dividend for 20 years, if they can’t afford it they can’t afford it now.

Return on Equity

This metric is brand new to me.  Return on equity is,

a measure of profitability that calculates how many dollars of profit a company generates with each dollar of shareholders’ equity.

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Let’s assume Company XYZ generated $10 million in net income last year. If Company XYZ’s shareholders’ equity equaled $20 million last year, then using the ROE formula, we can calculate Company XYZ’s ROE as:

ROE = $10,000,000/$20,000,000 = 50%

This means that Company XYZ generated $0.50 of profit for every $1 of shareholders’ equity last year, giving the stock an ROE of 50%.

Why it Matters:

ROE is more than a measure of profit; it’s a measure of efficiency. A rising ROE suggests that a company is increasing its ability to generate profit without needing as much capital. It also indicates how well a company’s management is deploying the shareholders’ capital. In other words, the higher the ROE the better. Falling ROE is usually a problem.

However, it is important to note that if the value of the shareholders’ equity goes down, ROE goes up. Thus, write-downs and share buybacks can artificially boost ROE. Likewise, a high level of debt can artificially boost ROE; after all, the more debt a company has, the less shareholders’ equity it has (as a percentage of total assets), and the higher its ROE is.

Some industries tend to have higher returns on equity than others. As a result, comparisons of returns on equity are generally most meaningful among companies within the same industry, and the definition of a “high” or “low” ratio should be made within this context.

I decided to screen ROE against the industry average.  As such I am looking for more efficient companies when compared to their industry.

Price to Book Value

Book value,

refers to the total amount a company would be worth if it liquidated its assets and paid back all its liabilities.

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Why it Matters:

Since book value represents the intrinsic net worth of a company, it is a helpful tool for investors wanting to determine if a company is underpriced or overpriced, which could indicate a potential time to buy or sell. For instance, value investors search for companies trading for prices at or below book value (indicating a price-to-book ratio of less than 1.0), which implies the shares are selling for less than the company’s actual worth.

My February 2018 Watch List

After applying the above screens my original list of 164 was reduced to just 11!  I like that this is higher than last month’s 6 because maybe it may mean that there was a correction in something I already own.

So what Companies am I looking to Buy?

Anyone familiar with any of these companies? Any opinion either way?