January 2019 Undervalued Dividend Growth Investment Screen and Purchase

by Evan

For years (minus a few breaks), I have been screening for possibly undervalued stocks that have increased their dividend payments to owners for 20 or more years.  The goal of this account is to eventually be turn on another income stream when it is needed.  Originally, I used various stock metrics (price to earnings, operating margins, etc.), and then about half way through 2018 I learned about the Acquirer’s Multiple / Magic Formula and used those techniques.  Since my goal for 2019 is to get back to the basics, this year I am going to go back to those easy to understand stock metrics to make my purchases.

Screening for Undervalued Dividend Growth Companies

Dividend Growth History

The very first hurdle that a company has to pass is whether it has increased its dividend for 20 or more years.  I am looking to build a sustainable income stream, and it is my hope (and all it is a hope) that if they have paid dividends for 2+ decades it is ingrained in their DNA and culture and they’ll continue to do so.

I use the Dividend Champion List (25+ years of dividend growth) and part of the Dividend Contender List (10 to 24 years of dividend growth).  The lists are maintained by The DRiP Resource Center.

Price to Earnings

The first metric I screen for is Price to Earnings.  Price to earnings is defined as,

the ratio for valuing a company that measures its current share price relative to its per-share earnings.

P/E is probably the most popular way to value stocks.  If you are reading this post you should probably already know that price init of itself is not a measure of a company’s value. In the past I have used different ratios (under 20, under industry average, under both 20 and industry average,  under 20 CAPE P/E, etc.) for calendar year 2019 I am going to focus on those stocks with a P/E under 15.

Dividend Yield and Payout Ratio

I am not dividend hunting, but I do want to get paid to have money invested with the company, so I am going to use a dividend yield of at least 2% for calendar year 2019.  Much more important than the yield is the Dividend Payout Ratio which is simply the amount of earnings per share that is being used to support the dividend.  While sources will have different views on the topic I like Dividends.com guidelines,

A range of 35% to 55% is considered healthy and appropriate from a dividend investor’s point of view. A company that is likely to distribute roughly half of its earnings as dividends means that the company is well established and a leader in its industry. It’s also reinvesting half of its earnings for growth, which is welcome.

Free Cash Flow Yield

New for 2019 is Free Cash Flow Yield.

Free cash flow measures the cash available to shareholders after a company has paid all of its bills in full. Buffett relies heavily on a similar metric that he dubs “owner earnings.”

One way to gauge a firm’s cash flow production is to examine its free cash flow yield. This is calculated by dividing free cash flow by market capitalization, or the inverse of the Price/FCF ratio. A firm with a free cash flow yield of 10%, for example, generates 10% of its total market value in cash each year. That cash, in turn, can be used to pay dividends or fund share buybacks — items that enhance shareholder returns.

Having seen a bunch of a different articles on the topic I liked this one best explaining where my gauge should be:

Having used the Free Cash Flow Yield a zillion times over the years, I have come up with these conservative parameters for my own investing.

For the more Aggressive, as well as the “Buy and Hold” investor, I would adjust everything down a notch, and for example, would make the hold from 2% to 5.9% and the buy from 6% to 9.9% and sell anything under 2%. As for shorting a stock that would be any result under zero, including any negative result. Here is a listing of those parameters for easy reference.

Since this is a pure buy and hold account I set my screener at 6%+ for Free Cash Flow Yield.

My January 2019 Watch List

After applying the 4 very strict screens I have coming up with the following companies to take a deeper look at:

Market CapitalizationDividend YieldSectorP/E Ratio (LTM)Payout RatioFree Cash Flow Yield
AROWArrow Financial Corporation4873.1%Financials13.7x39.6%8.8%
TAT&T Inc.220,8156.6%Communication Services6.6x38.1%9.3%
CTBICommunity Trust Bancorp, Inc.7323.5%Financials12.5x40.8%8.9%
CFRCullen/Frost Bankers, Inc.5,8782.9%Financials13.8x37.4%10.1%
JW.AJohn Wiley & Sons, Inc.2,7672.7%Communication Services14.3x38.8%6.7%
TGTTarget Corporation34,6653.7%Consumer Discretionary10.7x41.2%7.9%
FLICThe First of Long Island Corporation5423.2%Financials13.9x43.7%8.9%

Interesting mix of some very well known, massive companies and some tiny regional banks (FLIC in particular), also I have zero clue what JW.A does so I had to google that (publishing).

My January 2019 Undervalued Dividend Growth Stock Purchase

The next step for me was to take a quick look at the outstanding shares count over the past 5 years to see if management is keeping the share count either stable, or even better, buying back shares.  This left me with:

  • AROW
  • CTBI
  • JW.A
  • TGT

I decided this month to buy 10 Shares of TGT at $69.80.  

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1 comment

Buy, Hold Long January 8, 2019 - 10:45 pm

Fantastic, that’s so much for sharing that. I’m taking a look at the links now. Cheers


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