<Interesting screening criteria in this SA article>
Interesting, indeed. Something like a Magic Formula for dividend payers. A few weeks back, I posted the results of some screens I did, using an idea proposed by one of the SA authors who writes about dividend growth stocks. The idea was endorsed by David Van Knapp and David Fish. Simply put, add the current dividend yield to the lowest of the 3, 5, 7 and 9 year dividend CAGRs. A 10% total, along with a reasonable Payout Ratio for the industry, makes the cut. Gulseven uses earnings growth instead of dividend growth, but plans to look into using dividend growth down the road. What is very clever, though, is that he (or rather, Jeremy Siegel) adds a value element by introducing the PE ratio to the equation.
I use a variation of the Magic Formula for stock valuation. The originator of MF, Joel Greenblatt, ranks stocks on ROIC and Earnings Yield. Since I prefer FCF to earnings, I use CROIC and FCF Yield instead, then I look at 10 years worth of FCF Yield to determine where the current FCF Yield fits historically. For dividend stocks, I would use the same sum I mention above, i.e., current yield plus typical dividend growth rate, divided by the Price/FCF Ratio (inverse of the FCF Yield), while still insisting on a reasonable Payout Ratio.
ABT, e.g., produces excellent numbers.
Current yield = 3.8%
Typical dividend Growth Rate = 8.5%.
Current FCF Yield = 9.5% (very close to a 10-year high)
5-yr Median CROIC = 16.48% (I like to see > 12%)
Payout Ratio = 55%
BTW, one of the comments in the linked article contains a link to tessellation.com which contains some pretty useful info. Check it out if you haven't already. |
