January 2018 Undervalued Dividend Growth Watch List

by Evan

Monopoly card DividendFor the past few years, I have shared the painstaking task of taking the dividend champion (25+ years of dividend growth) and part of the dividend contender list (20+ years of dividend growth) and screen against stated metrics to narrow down my watch list for the month.  I then buy a lot or two depending on the month; a lot being defined as $500.  I am rather excited to apply my new screening metrics (outlined again below) to see what I am buying this month.  It is my goal this year to apply some real record tracking to this account this and take it as seriously as I would a source of income.

My Screening Metrics

As mentioned, this is the first time I am using this particular screen – some of the actual metrics are old (P/E) and some are new to me (ROE) and some have been modified (price to book).  Going into creating this watch list I wasn’t all that confident that I would end up with a ton of companies to do further research as the market is scorching.  But I am hoping to find something new to start a small position.

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 162 companies.

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.


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.


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.

In the past I had screened for screen for price to book value of under 4; now I am just screening for a book value lower than the company’s industry.

My January 2018 Watch List

After applying the above screens my original list of 162 was reduced to just 6!  It is no shock to me that my P/E requirement is what knocked out over  90% of the stocks out of the honor of being my next buy.  But I was shocked at how many companies were removed because of the price to book when compared to their industry.  I had 7 companies that made it all the way down to that step and then were removed because their P/B was higher than their industry average.  Even of the six listed below some of their P/B’s were higher albeit enough to be a rounding error.

So what Companies am I looking to Buy?

In alphabetical order we have:

  • Aflac – AFL
  • Chesapeake Financial – CPKF
  • Computer Services – CSVI
  • NACCO Industries – NC
  • Target – TGT
  • Weyco Group – WEYS

Finally, some new companies!  I don’t think CPKF, CSVI, NC or WEYS ever cleared a screen of mine. Not only have AFL and TGT shown up, I recently purchased lots of each.

Are you familiar with any of the new companies? Any opinions?

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