I’m always on the lookout for better theoretical mouse traps and every now and again am intrigued enough to run one through my wringer, the wringer being my off the wall portfolio and acerbic wit. The mouse trap in question being another in a long series of screeners used by investors to fine tune their stock picking acumen.
Today’s case in point is one presented by Seeking Fair Value that, to be fair, is technically his watch list as opposed to a portfolio review. I, like many others, have been stymied this year by ever higher valuations, his model is to identify potential undervalued stocks to add. As my interest is not increasing the number of holdings, my use is to identify existing positions that could be increased. His criteria include: Raising Dividends, Market Cap – 20B+, Morningstar Wide Moat, S&P Capital IQ Earnings and Dividend Ranking: A or A+, 10 Year DGR 7% or Greater, Payout Ratio 50% or Less and the Dividend Yield Theory. What piqued my attention was the use of the Dividend Yield Theory in the equation.
I began with the list of 206 companies held or acquired at/since the start of 2021.
Step 1: Eliminated ones sold (8) and non-dividend payers (17), which are either not applicable or definitionally non-DGI. This left 181.
Step 2: Using Google Finance’s Market Cap function, I identified and eliminated the 83 with a market cap of less than $20B. A goodly portion of these were community banks which have historically been fodder for M&A and some the Alpha derived from the portfolio. Bjorn Zonneveld recognized this deficiency with the publication of his watch list.
Step 3: Using Seeking Alpha, Identified and eliminated 38 with a payout ratio greater than 50%. I did not differentiate between Services (ADP, PAYX), REITs and Utilities – all of which generally have higher payout ratios. There is debate on this ratio, for instance the Dividend Diplomats set the bar at 60% which would have retained an additional 10 in the mix, including the likes of MCD, TXN and GIS.
Step 4: Using Dividend Radar’s 10-year Dividend Growth Rate dropped an additional 28 companies. Interestingly, a number were omitted only because they hadn’t attained the magic 10 year threshold – AAPL, AMGN, HUM, INTU and MSCI were in this category. An error in their data was found with YUM – in that the spinoff of YUMC was not normalized reflecting a dividend cut, whereas the combined entity (if shares in both companies were retained) actually delivered an increase.
Step 5: Morningstar’s Wide Moat dropped 8 and I used CFRA, rather than S&P Capital IQ, which dropped another 9.
I’m left with the realization that only 11 of the companies (10 if YUM is excluded) in my portfolio are deemed worthy enough for inclusion in this elite list and not one is undervalued. The question becomes, ‘What approach – if any – to take?’
Three (CMCSA, HD and BLK) are not actionable as they are overweight already. This exercise identified a reason why I’m struggling with getting these weightings in line as their 10-year DGRs are 13.83%, 20.43% and 13.13% respectively – a good problem to have.
Two, MSFT and RSG are significantly overvalued but I did buy more earlier this year catching some of the increase in valuation.
Two more, MA and V are overvalued as they are both pandemic and reopening plays. I currently drip V and both are underweight, meaning I may nibble on them from time to time.
The others were buys, YUM, USB and STT last week and JPM next week. YUM may increase on its re-inclusion in the CCC list and the other three may get a lift if the Fed allows them to raise dividends.
Interesting data but not earth shattering in that my overriding strategies remain intact. But it never hurts to ensure the path you’re following hasn’t had a fundamental change. Happy Fathers Day to all the dads!
Seeking Returns 