Dividends Value made a great post today about 12 Dividend Stocks with a 5-Star Strong Buy Rating.Â In the post, they went into a little detail about their model for determining ratings.Â It got me thinking – how does their model compare to ours?
The key feature of their model incorporates a star rating.Â They look at five important metrics and give a star for certain attributes in the company.Â 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.Â AÂ Star is added for amounts in excess of the target amount.
- Key Metrics: â€œDividend Growth Rateâ€, â€œYears of Div. Growthâ€, â€œRolling 4-yr Div. > 15%â€ and â€œYears to >MMAâ€ 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.Â We require companies to pass a number of tests to qualify as suitable to the Defensive or Enterprising Investors.Â Here are the tests that we require:
Defensive Investor â€“ must pass at least 6 of the following 7 tests:
- Adequate Size of Enterprise â€“ market capitalization of at least $2 billion
- Sufficiently Strong Financial Condition â€“ current ratio greater than 2
- Earnings Stability â€“ positive earnings per share for at least 10 straight years
- Dividend Record â€“ has paid a dividend for at least 10 straight years
- Earnings Growth â€“ 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 â€“ PEmg is less than 20
- Moderate Price to Assets â€“ PB ratio is less than 2.5 or PB x PEmg is less than 50
Enterprising Investor â€“ must pass at least 4 of the following 5 tests:
- Sufficiently Strong Financial Condition, Part 1 â€“ current ratio greater than 1.5
- Sufficiently Strong Financial Condition, Part 2 â€“ Debt to Net Current Assets ratio less than 1.1
- Earnings Stability â€“ positive earnings per share for at least 5 years
- Dividend Record â€“ currently pays a dividend
- Earnings growth â€“ EPSmg greater than 5 years ago
While the two methods are similar, we do have one main difference.Â We focus a lot of our criteria on balance sheet issues; Dividends Value tends to base more on dividend payout and cash flow.Â 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.Â 4 of the 12 would be suitable for the enterprising investor.Â Also, 9 of the 12 are considered undervalued based on our intrinsic value formula.Â 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.Â It was fun to find a model that obtains such similar results to ours!