Last month, I introduced the Dividend Portfolio and it turned out to be one of the most popular posts of the month.Â Today is the day to update the portfolio, but I have decided to split it into two parts.Â Since the portfolio is based on a screen of the valuation database’s top dividend payouts for the enterprising investor, I thought it would be best to put the screen here and expand on the merits of each company.Â Later today I will have another post that includes the update for the portfolio.Â If you find this method of updating the portfolio better than the way I updated the Low PE portfolio earlier this week, please leave a comment to let me know.Â I can only improve the site with feedback.
This screen targets the top dividend payouts out of the companies I follow here on Modern Graham that pass the tests for the enterprising investor, updated from Benjamin Graham’s tests presented in The Intelligent Investor.
Specifically, here are the tests required for the enterprising investor:
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
Additionally, a company can qualify for the enterprising investor if it passes the tests for the defensive investor.
This month, the screen produced the following companies:
- PMD â€“ Psychemedics Corp (23.38% dividend yield) – Psychemedics Corp nearly qualifies for the defensive investor as well as the enterprising investor, but falls short due to not having a large enough market cap and not having a long enough dividend history.Â The company does pass all of the tests for the enterprising investor, however.Â The last valuation of the company came out to a value of $8, and it seems the company’s current price is estimating a growth rate of only about 1%.Â The company has a strong balance sheet and would have a great dividend even if it ends up cutting it by 75%.Â I should note that the dividend yield may be artificially high (this data gets drawn from Yahoo!) as it appears the company made a special dividend last December when they started paying dividends.
- BGS â€“ B&G Foods Inc (8.45%) – B&G Foods passes four out of the five tests for the enterprising investor.Â The company fails the test for debt to net current assets.Â The latest valuation came to $14, and the market is currently only estimating a growth rate of a little over 3%.Â The company has grown normalized earnings from $0.17 in 2004 to an estimated $0.45 per share in 2009.Â There are certainly some minor concerns with the company – I don’t like the overall debt level – but it does pass the tests and seems to be stable enough with a strong dividend yield.
- NPK â€“ National Presto Industries (6.10%) – National Presto is a favorite of mine (and was a favorite of Graham himself – see chapter 15 of The Intelligent Investor).Â The company passes every single test for both the defensive and enterprising investors except for market cap.Â The current ratio is outstanding at 5.76 and there is no debt.Â The company pays dividends on an annual basis, and has increased the dividend from $0.75/share in 2005 to $4.55/share in 2009.Â In addition normalized earnings have grown from $1.76/share in 2003 to an estimated $6.11/share in 2009.
- ISH â€“ International Shipholding Corp (5.79%) – International Shipholding Corp does not look good for the defensive investor (passes only three out of seven tests), but is good for the enterprising investor, failing only the debt to net current assets ratio test.Â The company has achieved significant growth in normalized earnings from $0.28 in 2005 to an estimated $3.50 in 2009, and has a solid dividend.
- BMY â€“ Bristol-Myers Squibb Company (5.51%) – Bristol-Myers Squibb is another that is only suitable for the enterprising investor.Â The company’s balance sheet is pretty solid – current ratio of 2.16, but it has had trouble achieving income growth lately.Â As a result, the dividend has only increased from $0.98/share annually in 2000 to $1.24/share annually today.Â Nevertheless, the yield on the dividend is strong.
- OLN â€“ Olin Corp (5.12%) – Olin does not pass the tests for the defensive investor due to a lower market cap and negative earnings in 2001 and 2002.Â However, the company has a pretty strong balance sheet and if it can make it through the recession without earnings suffering too much – I believe it can – then it will emerge well.
- DD â€“ E.I. du Pont de Nemours and Company (4.91%) DuPont is only suitable for the enterprising investor.Â The company needs to improve its current ratio and improve its earnings growth in order to satisfy the defensive investor.Â However, earnings have been steady, which is a key component for a dividend investing strategy.
- PFE â€“ Pfizer Inc (4.70%) – Pfizer is suitable for both types of investors and the only area it could improve is earnings growth.Â Normalized earnings have only grown from $1.03 in 2004 to an estimated $1.37 this year.Â The balance sheet is strong, though, and despite cutting the dividend rate this year the yield is still pretty good.
- MRK â€“ Merck & Co Inc (4.65%) – Merck is in the same boat as Pfizer.Â Strong balance sheet and stable earnings but poor growth.Â Not much else to say about it.
- PM â€“ Philip Morris International (4.52%) – Philip Morris is a newcomer to this screen.Â Last month General Electric held this spot, but GE is no longer suitable for the enterprising investor so Philip Morris rises.Â The company could improve its current ratio but has strong earnings growth.Â Normalized earnings have gone from $1.27 in 2004 to $3.04 today.
Full Disclosure:Â At time of publication, author was long NPK and PFE.Â See a list of the author’s current holdings.
Photo by Benjamin Clark.
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