Comparing Models with Dividends Value – 12 Dividend Stocks

By Benjamin Clark

Dividends Value made a great post today about 12 Dividend Stocks with a 5-Star Strong Buy Rating. In the post, they went into a little detail about their model for determining ratings. It got me thinking – how does their model compare to ours?

The key feature of their model incorporates a star rating. They look at five important metrics and give a star for certain attributes in the company. According to the post, the following earn a star:

Fair Value: I look at five measures of fair value: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price, 4.) Graham Number and 5.) NPV MMA Price. Of the first four, the highest and lowest fair values are excluded and the remaining two calculations are averaged to calculate the Mid-2 price. Then I compare it with the NPV MMA Price and use the lower of the two.

Free Cash Flow Payout: A Star is awarded if the Free Cash Flow Payout is less than 60% and there were no negative free cash flows during the last 10 years.

Debt To Total Capital: Having less debt provides a company more financial flexibility. A Star is awarded if the Debt To Total Capital is less than 45%.

NPV MMA Diff: The value calculated is the net present value (NPV) of the difference between the dividend earnings of this investment and the interest income from the MMA over 20 years. A Star is added for amounts in excess of the target amount.

Key Metrics: “Dividend Growth Rate”, “Years of Div. Growth”, “Rolling 4-yr Div. > 15%” and “Years to >MMA” are considered Key Metrics. A Star is awarded if 2 of the 4 Key Metrics are true.

This method caught my attention because of its similarity in style to what we do here at ModernGraham. We require companies to pass a number of tests to qualify as suitable to the Defensive or Enterprising Investors. Here are the tests that we require:

Defensive Investor – must pass at least 6 of the following 7 tests:

Adequate Size of Enterprise – market capitalization of at least $2 billion
Sufficiently Strong Financial Condition – current ratio greater than 2
Earnings Stability – positive earnings per share for at least 10 straight years
Dividend Record – has paid a dividend for at least 10 straight years
Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period
Moderate PEmg ratio – PEmg is less than 20
Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50

Enterprising Investor – must pass at least 4 of the following 5 tests:

Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5
Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1
Earnings Stability – positive earnings per share for at least 5 years
Dividend Record – currently pays a dividend
Earnings growth – EPSmg greater than 5 years ago

While the two methods are similar, we do have one main difference. We focus a lot of our criteria on balance sheet issues; Dividends Value tends to base more on dividend payout and cash flow. However, after a little bit of comparison, it seems that we come to the same conclusion.

I looked at all 12 of the companies Dividends Value wrote about today, and the result is that 8 of the 12 would be suitable for the defensive investor. 4 of the 12 would be suitable for the enterprising investor. Also, 9 of the 12 are considered undervalued based on our intrinsic value formula. The other 3 are fairly valued (only because of our margin of safety, though – none are actually priced higher than the intrinsic value).

Here are the detailed results:

Automatic Data Processing (ADP) – Fairly Valued & Enterprising
AFLAC Incorporated (AFL) – Undervalued & Defensive
Chubb Corp (CB) – Undervalued & Defensive
Dover Corp (DOV) – Undervalued & Defensive
Emerson Electric Company (EMR) – Undervalued & Defensive
Johnson & Johnson (JNJ) – Undervalued & Defensive
McDonald’s Corp (MCD) – Undervalued & Enterprising
Nucor Corp (NUE) – Fairly Valued & Defensive
Paychex (PAYX) – Undervalued & Enterprising
Proctor & Gamble (PG) – Undervalued & Defensive
Sysco Corp (SYY) – Fairly Valued & Enterprising
United Technologies Corp (UTX) – Undervalued & Defensive

Thanks to Dividends Value for the great work today. It was fun to find a model that obtains such similar results to ours!

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Comparing Models with Dividends Value – 12 Dividend Stocks