Linked here is a PDF copy of my detailed analysis of Paychex Inc (PAYX) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: Paychex, Inc. provides payroll and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the United States.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. PAYX is trading at a discount to all but 4.) above. If I exclude the high and low valuation, and average the remaining two valuations, PAYX is trading at an astounding 30.7% discount. A Star is added since PAYX is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. PAYX earned two Stars in this section for 2.) and 3.) above. PAYX has paid a dividend since 1988 and has increased its dividend for the last 18 years (calendar year).
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. PAYX earned both Stars available in this section. If PAYX grows its dividend at 17.6% per year, it will only take 3 years to equal the long-term average money market rate of 4.61%. PAYX's NPV MMA Diff is an eye-popping $72,195.
Other: PAYX is a member of the S&P 500, is an Achiever, but is not an Aristocrat. The company has a strong balance sheet and generates a steady stream of cash. Risks to PAYX include the highly competitive nature of the outsourcing industry, low barriers of entry and the threat of alternative products. ADP, the industry leader, is promoting a payroll and tax software solution using Microsoft's small business software. This could potentially affect Paychex's growth in the small office market.
Conclusion: PAYX earned a Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of 5 Stars. This rates PAYX as a 5 Star-Strong Buy.
I don't think PAYX can sustain a 17% dividend growth rate in the near-term. Using my [D4L-PreScreen.xls] model I have determined that the growth rate can fall to 10.8% and PAYX will still generate the $10,000 NPV MMA Diff that I am looking for. Entering the 10.8% dividend growth rate into my [20-Year-DCF.xls] model and setting the EPS growth rate to 10.8%, the calculated fair-value of PAYX is $35.13, slightly above Friday's $33.65 closing price.
Historically, PAYX raises its dividend in August with a July declaration date. Based on the above analysis, I am comfortable adding to my PAYX position, as my allocation and valuation allows, but I will likely wait until after the next dividend declaration.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I owned shares of PAYX (2.8% of my Income Portfolio).
What are your thoughts on PAYX?
Recent Stock Analyses:
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Linked here is a PDF copy of my analysis of Paychex, Inc. (PAYX) (alt.1, alt.2). Last week I initiated a position in this stock. Below are some highlights from the above linked analysis:
Company Description: Paychex, Inc. provides payroll and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the United States.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. PAYX is trading at a discount to three of the four valuations above. If you average the middle two valuations, it is trading at a 17.1% discount. PAYX gets a Star for being fair valued.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. PAYX earned Stars in 1.), 2.) and 4.) above.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of the dividend stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. PAYX earned a Star for 1.) above.
Conclusion: PAYX earned one Star in the Fair Value section, three Stars in the Dividend Analytical Data section and one Star in the Dividend Income vs. MMA section for a total of Five Stars which rates it as a 5-Star Strong Buy.
Disclaimer: As always this is only my opinion and you should not rely on it. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I own shares of PAYX.
What are your thoughts on PAYX?
Recent Stock Analyses:
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In earlier articles, we have looked at each of these in depth. In addition, I look at four other metrics that individually are not as important as the above, but collectively provide great insight into the potential success of a stock as a dividend investment. Here are the four other key metrics that I look at when evaluating a dividend stock:
I. Dividend Growth Rate: The minimum dividend growth rate of the 1, 3, 5, 7, 10 year dividend growth rate or 15%, if "Rolling 4-yr Div. > 15%". This metric is True, if the dividend growth rate is 15% or greater. You can see how this is calculated in my D4L-PreScreen.xls model.
II. Years of Div. Growth: Years of consecutive dividend growth. This metric is True for 15 or more years.
III. Rolling 4-yr Div. > 15%: Dividends will double every 5 years if they grow by 15%. This test is True if dividends grew on average in excess of 15% for each consecutive 4 year periods, within the last 10 years of history.
IV. Years to >MMA: The number of years until dividend earnings exceed the earnings from a hypothetical money market account earning the MMA rate above, considering the other assumptions listed in "NPV MMA Diff." above. This metric is True if the number of years is less than 5.
Taken in the whole, these are tough metrics. Of the 87 stocks that I currently follow, only four had all the above metrics true. They were:AFLAC Inc. (AFL) - Analysis
These metrics focus on compound dividend growth, which is highly important for the successful dividend investor. In my new dividend analysis worksheet, a company will earn a Star for its other metrics if two of the above metrics are True.
Aflac Incorporated engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan.
- Dividend Growth Rate: 16.7%
- Years of Div. Growth: 27
- Rolling 4-yr Div. > 15%: True
- Years to >MMA: 1
Nucor Corp. (NUE) - Analysis
Nucor Corporation is engaged in the manufacture and sale of steel and steel products. As the largest minimill steelmaker in the U.S., Nucor has one of the most diverse product lines of any steelmaker in the Americas.
- Dividend Growth Rate: 15.0%
- Years of Div. Growth: 36
- Rolling 4-yr Div. > 15%: True
- Years to >MMA: 3
Paychex Inc. (PAYX) - Analysis
Paychex, Inc. provides payroll and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the United States.
- Dividend Growth Rate: 17.8%
- Years of Div. Growth: 17
- Rolling 4-yr Div. > 15%: True
- Years to >MMA: 0
McDonald's Corp. (MCD) - Analysis
McDonald's Corporation is the largest fast-food restaurant company in the world. Its restaurants serve a varied, yet limited, value-priced menu in more than 100 countries around the world.
- Dividend Growth Rate: 15.5%
- Years of Div. Growth: 32
- Rolling 4-yr Div. > 15%: True
- Years to >MMA: 2
Full Disclosure: Long AFL, NUE, PAYX, MCD. See a list of all my income holdings here.(Photo Credit)
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When investors purchase their initial position in a stock, it is usually after their most rigorous research. Once a stock is in their portfolio, some investors relax on the research for subsequent purchases. Each and every time you purchase a stock, you should run it through the same process as if you were buying it for the first time.
Case in point, my income portfolio currently consist of 8 ETFs and 27 individual stocks. Of the 27 individual stocks, only 7 of them would I consider purchasing today based on their valuation. They are listed below along with their buy below price and other information as of 9/12/2008:
AFLAC Inc (AFL) - Yield: 1.65%
Buy Below: $66.75
9/12 Close: $58.60
NPV MMA Diff: $13,075
Concern: The above data assumes a very aggressive dividend growth rate of 20%. With a low yield of 1.65%, AFL needs the high growth rate to be viable. From 1998-2007 the dividend growth rate averaged 22.3% with a low of 11.8% in 2001 to a high of 45.5% in 2007. Another concern is AFL's currency exposure in Japan, where roughly 75% of the company's earnings are derived.
BB&T Corporation (BBT) - Yield: 5.72%
Buy Below: $35.79
9/12 Close: $34.05
NPV MMA Diff: $10,573
Concern: BBT's exposure to the banking industry's current issues with funding and credit quality.
BP Plc (BP) - Yield: 6.29%
Buy Below: $83.28
9/12 Close: $54.79
NPV MMA Diff: $34,463
Concern: Failure to come to an understanding with Russia over its operations in the region (TNK-BP), inability to diversify away from Russia and terrorism could adversely affect BP's future performance.
General Electric (GE) - Yield: 4.40%
Buy Below: $32.69
9/12 Close: $26.75
NPV MMA Diff: $8,103
Concern: Slower-than-expected global economic growth, as well as manufacturing and regulatory problems and the potential for higher delinquency rates in GE's financial services segment.
Paychex Inc (PAYX) - Yield: 3.65%
Buy Below: $49.88
9/12 Close: $34.01
NPV MMA Diff: $149,426
Concern: The highly competitive nature of the outsourcing industry as well as the threat of new entrants into the human resources segment could pose problems for PAYX in the future.
Pfizer Inc. (PFE) - Yield: 6.96%
Buy Below: $27.72
9/12 Close: $18.62
NPV MMA Diff: $56,099
Concern: Patent expirations and pipeline uncertainties could cause PFE significant problems in the future if left unresolved.
Royal Bank of Canada (RY) - Yield: 3.99%
Buy Below: $49.08
9/12 Close: $46.46
NPV MMA Diff: $250,334
Concern: A further weakening of the Canadian economy, which grew at only 0.3% in the June quarter, a prolonged housing-related downturn in the United States economy, and unexpected sharp currency fluctuations.
The buy below price is the minimum of the Mid-2 (as described in Fair Value Data) and price needed to generate the minimum NPV MMA Diff. (as described in Measure What's Important). As always, you will need to do your own research and reach your on conclusion as to appropriateness of adding any of these securities to your portfolio.
Disclosure: Long in all the aforementioned securities.
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As a kid I loved math. Unlike classic literature where I had to correctly interpret symbolism that I rarely ever noticed, math was one of the few subjects that had a definitive answer - it was either right or wrong. I took great comfort in that. Dividend investing takes advantage of certain undeniable math principles. At the time of this writing I owned shares in RY, PAYX, MCD, SYY and AFL.
If you have examined one of my stock analyses, you may have noticed the metric "Rolling 4-yr Div. > 15%". This calculation determines if a company's dividends grew on average in excess of 15% for each consecutive 4-year period, within the last 10 years of history. For example, if on average dividends grew 15% or more for the periods 2005-2008 and 2004-2007 and 2003-2006 and so on to 1997-2000, then this test is true. The reason I like this metric is it identifies companies that consistently increase dividends. Another way of stating this is that if you held this company for any 4-year period over the last 10 years, you would have averaged a 15% dividend growth rate during the time you held the stock.
Contrast the above example with a company that grew its dividends at 1% per year for nine years, then sold some land in year 10 and paid a special dividend that resulted in a 140% year-over-year dividend increase. This company's average 10-year dividend growth rate is 15% [(140 + 9)/10]. Both companies would have a 15% 10-year average dividend growth rate. However, based on history the first company is more likely to raise its dividend by 15% in the future.
Ok, so why is 15% relevant? The power of 5/15, of coarse! Dividends will double every 5 years if they grow by 15% per year. Taking this undeniable math principle into consideration, it often makes sense to purchase a stock with a lower yield but with a higher growth rate. Here are few companies that I own that have the power of 5/15 working for them: Royal Bank of Canada (RY), Paychex Inc (PAYX), McDonald's (MCD), Sysco Corp (SYY) and AFLAC Inc (AFL).
Do you have the power of 5/15 working for you?
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A home insurance or a health insurance deal is different than a dental insurance or a car insurance or any other insurance deal.
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I would not say the old model was broke, but it had too many moving parts. It usually got to the right answer, but not always in a logical manner. Sometimes the model did not get to the right answer and I would have to manually override it. So, what's new in the updated model?
I. Five and Only Five Stars
In the old model a stock could end up with more than five stars or less than zero Stars, based on an elaborate system of adding and subtracting of Stars. In designing the new model, I eliminated the situations where a Star was deducted and focused on the four most important characteristics of a good dividend stock, each was worth a Star. I then rolled four lesser characteristics into the fifth Star. The following will now earn a Star:
II. A Sliding NPV MMA Diff Target
Previously there were three targets: $2,500 for companies that have raised dividends for 25 or more years, $7,500 for those between 10 and 25 years and $10,000 for those less than 10 years. This created cliffs. For example a company that has raised its dividend for 24 years had a target of $7,500 this year, then it would go to $2,500 after the next increase. In the new model, I use annual dividends, not cumulative so the numbers are smaller. Also, I implemented a sliding target based on the number of consecutive dividend increases going from a low of $500 (for 30 or more years) to a high of $3,500 (for no increases). Each year increase moves the scale by $100 between the low and high values above.
III. Other Relevant Information
In addition to the above, I added other relevant information for the readers consideration, such as the Risk Rating.
The end result is a more streamlined model focusing on what is important when identifying stocks that could be great dividend investments. One additional benefits is that the new Star calculations can occur on the fly. Thus, I can always see an up to date Star rating on my dashboard for each of the stocks I follow. At the time of this writing, the following stocks rated as 5-Star Strong Buys:
The ability to see updated ratings and key metrics on the 86 stocks that I currently follow allows me to more closely gauge the best time to buy (or sell). I have incorporated this into the D4L-Dashboard.
Full Disclosure: Long AFL, JNJ, MCD, NUE, PAYX, PG, SYY, UTX. See a list of all my income holdings here.
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As part of defining your investing process, don't forget to spend some time understanding risk. Seasoned investors will tell you that you should know your risk profile before starting to invest. There are several tools available on the web to help you gauge your risk profile. Here are a few:
Once you know your investment risk profile, how do you gauge the risk of individual securities in your portfolio or your portfolio as a whole? I tend to weigh the risk on my portfolio as a whole and make adjustments through the selection of more or less risky investments. For my dividend stocks I look at these measures:
1. S&P Qualitative Risk Assessment + S&P S&P Quality Ranking
My broker provides S&P reports on individual securities and most ETF/CEFs. As part of this report S&P includes a Qualitative Risk Assessment and Quality Ranking. They define these as such:
For my tracking purposes, I combine the two into a RQ (risk/quality) rating and assign A (low), B (medium) or C (high) for the Qualitative Risk Assessment and 1 (A+) to 8 (D) for the Quality Ranking. Thus a company such as Coca-Cola (KO) that has a Low Qualitative Risk Assessment and a Quality Ranking of A would be represented as an A2 company in my system. Here are some combined rankings on several popular dividend company's:
capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings from highest to lowest: A+, A, A, B+, B, B-, C, D and Not Ranked.
Currently, I don't have any C stocks. My most risky stocks have a rating of B4. I like use this metric to evaluate my dividend stock portfolio in total. The weighted average of my dividend stock portfolio is A3. I am comfortable with that rating, but under the right circumstances I would be willing allow it to fall to B2. If the overall portfolio fell to a B (moderate risk), I would limit the S&P Quality Ranking to a 2 (A). I would never want the overall S&P Quality Ranking to drop below a 3 (A-). Click here to see the RQ rating for all my dividend stock holdings.
2. Current Dividend Yield and NPV of MMA Differential
All things being equal, higher risk stocks command a higher dividend yield. Consider these two extremes:
If you had to invest your life's savings in only one of the above stocks, which would you choose? Your answer will reveal something about your risk tolerance. Obviously, the market believes that WMT is less risky than CTL.
When judging risk I like to look at current dividend yield in conjunction with NPV of MMA Differential. A high yield and a high NPV of MMA Differential could indicate a risky stock. Here are some risky stocks and ETF/CEFs that I am holding based on a high current yield and NPV of MMA Differential:
Many of the recent companies that I sold after a dividend cut resided at or near the top of this list when they cut their dividend. Of the two methods, I have found the second one to be a better indicator of future performance.
In addition, I also look at the current market price vs. my calculated Buy Below price. A large disparity indicates the market believes the stock will perform much differently in the future than it has in the past. As with any forward looking exercise, it is a mixture of art and science.
Full Disclosure: At the time of this writing, I was long in GE, USB, JNJ UTX, PG, WMT, AOD, ETO, CTL, PAYX
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So far in 2009, the Dividend Aristocrats have under-performed the S&P 500. However there are several dividend stocks that have done quite well and beat the S&P 500 index, and some of those companies just might surprise you!
Below are ten dividend stocks that have out-performed the S&P 500 this year through May 15, 2009:
10. Coca-Cola Co (KO) - Return: 0.4% - Yield: 3.76%
The Coca-Cola Company engages in the manufacture, distribution, and marketing of nonalcoholic beverage concentrates and syrups worldwide. Risk Rating: Low (1.50) - Analysis
9. Sysco Corp (SYY) - Return: 0.5% - Yield: 4.20%
SYSCO Corporation, through its subsidiaries, engages in the marketing and distribution of a range of food and related products primarily for foodservice industry in the United States and Canada. Risk Rating: Low (1.00) - Analysis
8. BP ADR (BP) - Return: 1.4% - Yield: 7.37%
This supermajor integrated oil company (formerly BP Amoco p.l.c.) is based in London and is the world's second largest publicly owned oil company and the fourth largest U.S. refiner. Risk Rating: Medium (1.75) - Analysis
7. 3M Co (MMM) - Return: 1.8% - Yield: 3.52%
3M Co. is a diversified technology company with a presence in various businesses, including industrial & transportation, healthcare, display & graphics, consumer & office, safety, security & protection services, and electro and communications. Risk Rating: Low (1.50) - Analysis
6. Paychex Inc (PAYX) - Return: 4.1% - Yield: 4.63%
Paychex, Inc. provides payroll and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the United States. Risk Rating: Medium (1.75) - Analysis
5. Intel Corp (INTC) - Return: 5.6% - Yield: 3.69%
Intel Corporation engages in the manufacture and sale of semiconductor chips, as well as in the development of advanced integrated digital technology platforms for the computing and communications industries worldwide. Risk Rating: Medium (1.75) - Analysis
4. Canadian National Railway ADR (CNI) - Return: 7.0% - Yield: 2.24%
Canadian National Railway Company (CNI) operates Canada's largest railroad, linking customers in Canada, the U.S., and Mexico through approximately 20,400 miles of track. Risk Rating: Low (1.25) - Analysis
3. Manulife Financial Corp ADR (MFC) - Return: 8.0% - Yield: 4.78%
Manulife Financial Corporation is a life insurance company with customers in the United States, Canada and Asia. It is the holding company of The Manufacturers Life Insurance Company and John Hancock Financial Services. Risk Rating: Medium (1.75) - Analysis
2. CenturyTel Inc (CTL) - Return: 13.5% - Yield: 9.27%
CenturyTel Inc. provides a range of telephone services in 25 states, with operations concentrated in Alabama, Arkansas, Louisiana, Missouri and Wisconsin. Risk Rating: High (2.50) - Analysis
1. Royal Bank of Canada ADR (RY) - Return: 22.8% - Yield: 4.47%
Royal Bank of Canada (RBC) offers a range of banking and financial services in North America and internationally. Risk Rating: Low (1.50)
Over the same period the S&P 500 (VFINX) was down 1.2%. The returns were calculated using Yahoo's dividend adjusted stock price for December 31, 2008 as the starting point. Some interesting items to note: The list contains four ADRs (3 Canadian, 1 British). RY's dividend has been frozen since November 2007. CTL is the only High Risk stock to make the list based on my risk rating. The top five were less traditional dividend stocks that had been beaten down to low levels.
Short-term performance is never the sole reason for long-term investors to buy. What goes up significantly usually comes back down. Case in point, last years two dividend darlings, Wal-Mart (WMT) and McDonalds (MCD), found themselves in the bottom ten of this list, each down 13.2%.
Full Disclosure: Long in all the aforementioned securities. See a list of all my income holdings here.
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There are many ways to value a company. Price to earnings. Price to cash flow. Liquidation value. Price per eyeballs on website. Price to a number I completely made up (this one never gets old). Price to CEO's ego divided by lobbying activity as a percentage of revenue (this one doesn't get used enough). Which one is best? They're all limited and reliant on assumptions. No single metric holds everything you need to know.
The metric I'm using today is no different. But it's perhaps the most encompassing, and least susceptible to hidden complexities of a company's financial statements. The more I think about it, the more I feel it's one of the most useful metrics out there. What is it? Enterprise value over unlevered free cash flow. Using this metric, here are five companies I found that look attractive: Ford (NYSE: F), ConAgra (NYSE: CAG), Visa (NYSE: V), Clorox (NYSE: CLX) and Paychex (Nasdaq: PAYX)
Source: Motley Fool
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Each Sunday I highlight the Carnivals I participated in over the past week, along with any notable articles that I came across. For those readers not familiar with carnivals, it's where personal finance bloggers submit their best articles of the week with one blog serving as the host. The entries are separated into various categories such as Investing, Credit, Debt, Budgeting, Frugality, Wealth Building, Money Management, Financial Planning, Insurance, Taxes, The Economy, Real Estate, et. al.
Below are the carnivals that I participated in this week, along with a link to my article:
Articles I enjoyed reading included (in no particular order):
The DIV-Net Featured Articles
Articles From DIV-Net Members
The Wealth, Money & Life Network Featured Articles
Other Articles
There are some really good articles here, please take time and read a few of them.
(Photo: Sachin Ghodke)
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MMM earned one Star in this section for 3.) above. It has paid a cash dividend to shareholders every year since 1916 and has increased its quarterly cash dividend payments for 50 consecutive years. MMM earned no Stars in this section, and had one Star deducted for a negative NPV MMA Diff. In effect, if you invested equal amounts in a MMA earning of an average of 4.61% for 20 years and MMM stock with a dividend yield of 2.88% and growing at 4.2% annually, you would have $1,556 less in MMM stock per $1,000 invested. Other: MMM is a member of the S&P 500, is an Achiever and an Aristocrat. S&P noted that historically the company provides stable earnings and dividends. MMM enjoys a leading position in many of the end markets that it serves, a strong balance sheet with a relatively low amount of debt, and free cash flow that has averaged about 95% of net income over the past 10 years. Conclusion: MMM earned a Star in the Fair Value section, earned a net zero Stars in the Dividend Analytical Data section and earned no Stars in the Dividend Income vs. MMA section for a net total of 1 Star. This rates MMM as a 1 Star-Very Weak stock. 
Linked here is a PDF copy of my analysis of 3M Co (MMM) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: 3M Co. is a diversified technology company with a presence in various businesses, including industrial & transportation, healthcare, display & graphics, consumer & office, safety, security & protection services, and electro and communications.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
MMM is trading at a discount to all except 4.) above. If I exclude the high and low valuation, and average the remaining two valuations, MMM is trading at a 19.3% discount. A Star is added since MMM is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
Using my [D4L-PreScreen.xls] model I determined the dividend growth rate would have to average 9.8% for MMM to generate a NPV of MMA Differential of $3,000 that I look for from a company that is both an Achiever and an Aristocrat. With the current dividend and an estimated growth rate of 4.2%, the share price would have to be $44.54 before I would consider initiating a position in MMM.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I do not own shares of MMM (0.0% of my Income Portfolio).
What are your thoughts on MMM?
Recent Stock Analyses:
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Dividend stocks as a group have started to trade in a range as investors contemplate the effect that the upcoming interest rate hike will have on their valuation. From our perspective, the decision on whether dividend stocks are a good hold in a rising-interest-rate environment is a moot point — as long as we’re looking for the right stocks. The “right” dividend stocks in our book not only pay healthy dividends, but also have strong growth prospects.
We’ve scanned our database to identify companies that have strong dividend and earnings growth that are also trading in technically strong patterns. This combination built a list of three dividend stocks that should produce ironclad payouts … and some capital appreciation: Cisco Systems, Inc. (CSCO) and Altria Group Inc (MO), Paychex Inc. (PAYX).
Source: InvestorPlace
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Linked here is a PDF copy of my analysis of BB&T Corporation (BBT) (alt1, alt.2). Below are some highlights from the above linked analysis:
Company Description: The BB&T Corporation operates as a holding company for Branch Banking and Trust Company that provides commercial banking and trust services for small and mid-size businesses, public agencies, local governments, and individuals in the United States.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. BBT is trading at a discount to all the above valuations. If I exclude the high and low valuation, and average the remaining two valuations, BBT is trading at an astounding 31.3% discount. A Star is added since BBT is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. BBT earned one Star in this section for 3.) above. It has paid a cash dividend to shareholders every year since 1903 and has increased its quarterly cash dividend payments for 36 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. BBT earned both Stars available in this section. With a 7.56% current yield, BBT is paying well in excess of the long-term average money market rate of 4.61%. BBT's NPV MMA Diff is $17,688.
Other: BBT is a member of the S&P 500, a Dividend Aristocrat and a member of The Broad Dividend Achievers™ Index. S&P commented that BBT has strong credit quality in its loan portfolio, and a good history of profitability. In a difficult operating environment, BBT has grown commercial and industrial lending, while maintaining acceptable credit quality and funding growth. BBT is exposed to the Florida housing market, but the company has said it has not made loans to the riskiest segments of the Florida housing market, such as condominium developments.
Conclusion: BBT earned a Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of 4 Stars. This rates BBT as a 4 Star-Buy.
Last week after analysts speculated that BBT would cut its dividend, the company issued a statement reaffirming an earlier assertion that the company's capital levels remain strong and management anticipates "some increase in the cash dividend during 2008." Based on the above analysis, I would be comfortable adding to my BBT position, as my allocation and valuation allows.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I owned shares of BBT (1.9% of my Income Portfolio).
What are your thoughts on BBT?
Recent Stock Analyses:
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Linked here is a PDF copy of my detailed analysis of iStar Financial Inc. (SFI). Last week I added to my position in this stock. Below are some highlights from the above linked analysis:
Company Description: iStar Financial, Inc. operates as a finance company focused on the commercial real estate industry. The company, which is taxed as a real estate investment trust (REIT), provides financing to private and corporate owners of real estate.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. SFI hits a home run here. It is trading at a discount to all four valuations listed above. If I exclude the high and low valuation, and average the remaining two valuations, SFI is trading at a 21.2% discount. SFI gets a Star for being fair valued.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. SFI earned Stars in 3.) and 4.) above.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. SFI earned Stars for 1.) and 2.) above.
Other: SFI, which focuses on commercial real estate industry, may have been unfairly pulled down in the sub-prime meltdown. Its 11.78% yield combined with a solid history of raising dividends makes this stock worth a second look. It is important to note that that the abnormally high payout ratio is due to the company's status as a REIT, which requires it to pay out 90% of its earnings each year.
Conclusion: SFI earned one Star in the Fair Value section, two Stars in the Dividend Analytical Data section and two Stars in the Dividend Income vs. MMA section for a total of Five Stars which rates it as a 5-Star Strong Buy.
Disclaimer: As always this is only my opinion and you should not rely on it. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I own shares of SFI.
What are your thoughts on SFI?
Recent Stock Analyses:
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While many companies offer dividends to make up for earnings growth and stock appreciation, others reward investors from all angles. Yeah, yeah — a stock that can provide big-time income and sweet share appreciation isn’t just an investor’s dream come true. It also sounds too good to be true.
And admittedly, the combo is difficult to find, especially considering that a dividend stock’s yields naturally dwindle as its share prices rise. But a few dreamy stocks have have provided double rewards for loyal shareholders so far in 2013. Texas Instruments (TXN), Seagate Technology (STX), Paychex (PAYX), Lockheed Martin (LMT) and Blackstone Group (BX) are five dividend stocks that have been anything but sleepy so far this year.
Source: Investor Place
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If you review past articles on Income Investors, you might spot a common theme: the best-performing stocks are often those of quiet, unassuming businesses that throw off steady income. You can see this in names like Ecolab Inc. (NYSE:ECL) (cleaning supplies), Paychex, Inc. (NASDAQ:PAYX) (payroll processing), and Waste Management, Inc. (NYSE:WM) (trash collection).
None of these companies make for the best conversation around the office water cooler. But because they provide essential services and enjoy entrenched market positions, they throw off large, growing dividends to their investors. Case in point today: Public Storage (NYSE:PSA). Over the past few decades, this partnership has quietly acquired thousands of self-storage warehouses. And while the firm hasn’t received much press coverage, there might be no better business in the world, especially if you like earning globs of dividend income.
Source: Income Investors
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Last week I posted a Stock Analysis on PAYX including a link to a PDF containing a detailed analysis. In this article, I will explore the section titled Fair Value Data (located in the top left section of the above linked PDF). This section provides metrics to help you to determine if the investment is trading at a premium, discount or if it is fairly priced. Below is a description of each item in the Fair Value Data section from page 2 of the detailed analysis:
Closing Price:
Recent closing price. A Star is added if the closing price is less than the average of "Avg. High Yield Price", "20-Year DCF Price" and "Avg. P/E Price"; or less than the "Graham Number". A Star is deducted if the closing price is 5% greater than the "Mid-2 Fair Value" high price.
Avg. High Yield Price:
Price calculated by dividing current dividend per share by the average high dividend yield for each of the last 5-years (dividend per share divided by the year's low share price).
20-Year DCF Price:
Price calculated by taking the Net Present Value (NPV) of the next 20 years of dividends and the estimated value of the stock at the end of 20 years. Below are the assumptions used for this company: Discount rate: 15.0% EPS growth rate: 17.1% Div. growth rate: 18.5% Calculated NPV: $68.14
Avg. P/E Price:
Price calculated by multiplying the EPS (trailing twelve months) times the minimum of: 1.) 5-year average of high and low P/Es or 2.) Last years high P/E.
Graham Number:
Price calculated by taking the square root of 22.5 times the tangible book value per share times EPS (trailing twelve months). Benjamin Graham, Warren Buffett's mentor and the father of value investing, developed rules for the defensivly screening stocks. This formula uses his principles to calculate the "maximum" price one should pay for the stock. He believed - as a rule of thumb - the product of P/E ratio and price-to-book should not be more than 22.5 (P/E ratio of 15 x price-to-book value of 1.5). The 15 P/E was was a result of Graham wanting his portfolio to have a yield equal yield to that of a AA bond (back then around 7.5%). The inverse of this yield is 1 divided by 7.5%. That works out to 13.3; he rounded up to 15.
Mid-2 Fair Value:
Range of fair values with the low-end equal to minimun of the four fair value calculations above, and the high-end is equal to the average excluding the highest and lowest fair value calculations. The discount or premium is calculated using the high-end of the range.
The Closing Price is as of the date shown in the Fair Value Data title.
The Avg. High Yield Price is calculated by dividing current dividend per share by the average high dividend yield. For example, say a stock has a 5-year average yield of 2.5% and its current annual dividend is $1.00 per share, then the calculated fair value is $40.00 per share ($1.00 / .025). If the closing price is less than $40.00 then the stock is selling at a discount based on the Avg. High Yield Price.
The value of any investment can be estimated using a discounted cash flow (DCF) model. That is what the 20-Year DCF Price is based on. The historical inputs to this model are: annual earnings per share (EPS), annual dividend per share and price earnings (P/E) ratio.
In addition, the following future assumptions are entered into the model: discount rate, EPS growth rate and dividend growth rate. My model defaults to the following values based on historical data. EPS growth rate: the minimun of the historical 5- or 10-year growth rate; dividend growth rate: as described in my earlier post, Dividend Analytical Data. My target discount rate is 15%. The model assumes the stock is sold at the end of 20 years. The assumptions used for any given stock analysis are shown in the 20-Year DCF Price section on page 2, along with the calculated net present value (NPV). Needless to say, this is the most complicated fair value calculation of those presented and these two paragraphs can't begin to do it justice.
The Avg. P/E Price price is a fairly straight forward calculation. It is calculated by multiplying the trailing 12-months (TTM) EPS times the stocks P/E. For example, if the TTM EPS for a company was $3.80 and it had a P/E of 12, then the calculated fair value is $45.60 per share ($3.80 x 12). If the closing price is less than $45.60 then the stock is selling at a discount based on the Avg. P/E Price.
The Graham Number is calcculated by taking the square root of 22.5 x tangible book value per share x TTM EPS. For example, if the TTM EPS for a company was $6.80 and it had a tangible book value per share of $12.50, then the calculated fair value is $43.73 per share (square root[$6.80 x 22.5 x 12.50]). If the closing price is less than $43.73 then the stock is selling at a discount based on the Graham Number. Since the Graham Number tends to be the most conservative value, the stock is awarded a fair value Star if it is trading below it.
The Mid-2 Fair Value (shown on pg. 2 of the linked analysis) sets a range of fair values, with the low-end of the range equal to the lowest of the four calculations described above. The ranges high-end is equal to the average of the remaining values after excluding the highest and lowest values. The discount or premium shown throughout the document is calculated using the high-end of the range.
What do you consider when determining the fair value of a stock?
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- Is It Time To Upgrade Your Portfolio?
- My Unique Investing Process
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Dividend stocks are very appealing to investors, for good reason. Growth stocks tend to make the headlines — with the 2020 pandemic, shareholders in key areas like vaccine development and working from home technology saw triple-digit gains. In contrast, dividend stocks don’t have the same degree of frenzy. Owning shares in companies that offer regular dividend payments may not have the same thrill, but it’s a great way to generate profit. You can then use those earnings to invest in high growth stocks.
Here 7 top tech dividend stocks worth taking a chance on: Cisco Systems (NASDAQ:CSCO), CSPi (NASDAQ:CSPI), International Business Machines (NYSE:IBM), Juniper Networks (NYSE:JNPR), NVE (NASDAQ:NVEC), Paychex (NASDAQ:PAYX) and Sabre (NASDAQ:SABR). I’m focused on dividend performance here, so the catch is that some choices that might receive a low overall rating in Portfolio Grader. However, each has real appeal as a dividend generator.
Source: NASDAQ
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CINF earned one Star in this section for 3.) above. It has paid a cash dividend to shareholders every year since 1954 and has increased its quarterly cash dividend payments for 48 consecutive years. CINF earned two Stars in this section. The NPV MMA Diff of $14,964 is well above the level I look for. With a current yield of 5.98%, CINF exceeds the 4.61% long-term average MMA rate. Other: CINF is a member of the S&P 500, is an Achiever and an Aristocrat. S&P believes the company is a conservative underwriter with sound risk and capital management policies. CINF has improved its underwriting, investment results and profitability in recent years. However, CINF will face price competition in its core markets. CINF also has among the lowest rates of return on equity in its peer group. If industry consolidation activity increases, CINF could be viewed as a takeover candidate.
Linked here is a PDF copy of my analysis of Cincinnati Financial Corp (CINF) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: This insurance holding company markets primarily property and casualty coverage; it also conducts life insurance and asset management operations.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
CINF is trading at a discount to all the above. If I exclude the high and low valuation, and average the remaining two valuations, CINF is trading at a 50.9% discount. A Star is added since CINF is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
Conclusion: CINF earned a Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of 4 Stars. This rates CINF as a 4 Star-Buy.
Using my [D4L-PreScreen.xls] model I determined the dividend growth rate could approach zero and CINF would still generate a NPV of MMA Differential close to the $3,000 that I look for from a company that is both an Achiever and an Aristocrat. Given the recent melt-down in the financial sector, most financials that have not cut their dividend are quantitatively grading out as Buy or Strong-Buy. Though interesting, CINF hasn't shown me enough to initiate a position in it.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I do not own shares of CINF (0.0% of my Income Portfolio).
What are your thoughts on CINF?
Recent Stock Analyses:
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Most of the market’s best dividend stocks are well-known, and well-owned. Thing is, there’s more than another handful of stocks with strong dividend yields that are either off-the-radar, unrecognized as solid dividend stocks or both.
So, if you’re looking for a few possibly underestimated and underappreciated dividend stocks out there, consider this list of five of the best names with a great dividend yield that might surprise most investors. Dividend Stocks to Buy: Cisco (CSCO), Tupperware Brands (TUP), ABB Ltd (ABB), Canon (CAJ) and Paychex (PAYX).
Source: InvestorPlace
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