HomeInvestmentsSeptember 2018 Undervalued Dividend Growth Watch List

September 2018 Undervalued Dividend Growth Watch List

Monopoly card DividendPreparing these posts are a lot like my net worth posts in that it takes an otherwise mundane activity and forces me to pay attention.  Force may not be the correct word as I could always just ignore the task, but I believe it to be helpful to at least one person, myself.

Thoughts prior to the screen: Not sure why, but if the opportunity presents itself I’d like to purchase a lot of something new.  While some months I am looking to add to an older hold, or a particular sector, this month feels like a “buy something new” month.

My Screening Method for Under Valued Dividend Growth Stocks

I used to use metrics based on the price of the stock (P/E, P/B, Yield, etc.), however, earlier this year, I finished Tobias Carlisle’s book, The Acquirers Multiple, and decided to give the valuation method a chance.  The method was very different than what I had been previously doing for the past couple of years.  It focuses a lot less on using price as the main metric and more on the balance sheet and earnings.  Despite really enjoying the book, I decided to use a slightly different formula, the Magic Formula by famed hedge fund manager Joel Greenblatt.  The reason I made that decision was not because I believed one guru over the other it was simply because of what I could obtain in a free screen.

What is the Magic Formula

The Magic Formula,

is a quant screen…that identifies great companies selling at a discount. The process is simple. To identify great companies Greenblatt screens for companies with a high return on invested capital (ROIC). And to identify companies that are “cheap” Greenblatt uses the company’s earnings yield.

The formula is basically Enterprise Value/EBIT.  Enterprise Value is,

a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization. Enterprise value is calculated as the market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents

is an indicator of a company’s profitability, calculated as revenue minus expenses, excluding tax and interest. EBIT is calculated as:

EBIT = Revenue – Operating Expenses (OPEX)


EBIT  = Net Income + Interest + Taxes

EBIT is also referred to as Operating Earnings, Operating Profit, and Profit Before Interest and Taxes (PBIT).

How Did I Screen for the Magic Formula?

After way longer than I’d like to admit I found an amazing, free site to easily screen for EV/EBITDA (rather than EBIT).  The site is called FinBox and I would highly recommend it for anyone that is trying to screen for almost anything.  The EV/EBIT is a premium feature on the site, and I may opt to sign up for the service in the future, but right now, I am just learning about this method of valuing companies.

My September 20108 Dividend Growth Watch List and Purchase

First thing I did was create a screen for those companies with a magic formula of less than 10, a dividend yield of at least 1.5% and a P/E under 20.  This gave me a list of 320 companies.  At the same time I wanted companies that have increased their dividends at least 20 years, so I turned to the dividend champion and part of the dividend contender list which provided 165 companies.  Cross referencing the two left me with the following 19 companies (JW-A and JW-B showed up):

ADM Archer-Daniels-Midland Company Consumer Staples
T AT&T Inc. Telecommunication Services
CVX Chevron Corporation Energy
EV Eaton Vance Corporation Financials
XOM Exxon Mobil Corporation Energy
MGRC McGrath RentCorp Industrials
JW.B John Wiley & Sons, Inc. Consumer Discretionary
JW.A John Wiley & Sons, Inc. Consumer Discretionary
NC NACCO Industries, Inc. Energy
NFG National Fuel Gas Company Utilities
NUE Nucor Corporation Materials
PNR Pentair plc. Industrials
TROW T. Rowe Price Group, Inc. Financials
TGT Target Corporation Consumer Discretionary
TDS Telephone and Data Systems, Inc. Telecommunication Services
UGI UGI Corporation Utilities
UVV Universal Corporation Consumer Staples
WBA Walgreens Boots Alliance, Inc. Consumer Staples
BPL Buckeye Partners L.P. Energy
ENB Enbridge Inc Energy

Narrowing the Watch List

To further narrow the list, I respected the formula which states to remove financials and utilities.  I also removed any stock that is in health care and energy.   This left me with the following companies:

Ticker & Name

  • ADM – Archer-Daniels-Midland Company
  • T – AT&T Inc.
  • MGRC – McGrath RentCorp
  • JW.B – John Wiley & Sons, Inc. (the JW.B stock is on the dividend champion list so will focus on that share class)
  • NUE – Nucor Corporation
  • PNR – Pentair plc.
  • UVV – Universal Corporation
  • WBA – Walgreens

I am shocked how many were left.  In the many years I have been doing these types of screens I don’t ever remember seeing JW.B and PNR.

Outstanding Shares

In addition to companies with a long history of dividend growth, and a lower magic formula number, I want a company that isn’t using their ability to print shares as a means to increase cash flow.  In the month’s past I would share all the 5 year outstanding share charts but with a narrowed list of 9 that seems like a lot of work!

Just know that I looked up each one on Macro Trends.   I am looking for a multi-year trend of flat or decreasing shares.  I don’t have a particular science to this part, just eyeballing.  A little bit of an increase doesn’t bother me if it is within reason given the amount of outstanding shares.  Those companies with flatish or decreasing shares are:

  • ADM
  • MGRC
  • JW.B
  • NUE
  • PNR
  • TGT
  • WBA

Wow, still so many choice left! Four of the companies are symbols that don’t scream at me which is exactly what I was looking for! Those are  MGRC, JW.B, NUE (one lot purchased last month) and PNR.  Next step was to pull up each company’s P/E (old habits die hard) and one in particular jumped out at me – MGRC with a P/E of 7.83.

It is about time to take a look at what MGRC does to make money:

The Company is a diversified business to business rental company with four rental divisions: relocatable modular buildings, portable storage containers, electronic test equipment, and liquid and solid containment tanks and boxes. Although the Company’s primary emphasis is on equipment rentals, sales of equipment occur in the normal course of business. The Company is comprised of four reportable business segments: (1) its modular building and portable storage segment (“Mobile Modular”); (2) its electronic test equipment segment (“TRS-RenTelco”); (3) its containment solutions for the storage of hazardous and non-hazardous liquids and solids segment (“Adler Tanks”); and (4) its classroom manufacturing business selling modular buildings used primarily as classrooms in California (“Enviroplex”).

Interesting, I like the rental aspect of it – income comes in without getting rid of the underlying asset.  After searching a bit on seeking alpha, twitter and a few other sources for more about the company I think I am convinced it is something I am going to want to hold for a few years.

Stats at purchase:

  • P/E – 7.82
  • Dividend Yield – 2.29%
  • Payout Ratio – 17%
  • EV-EBITDA – 8.66 (GuruFocus)




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