| | | What I do is every few months I run every stock I own or am interested in through a screen. I use the following factors in the screen:
- Five-year Dividend Growth - must be positive, above 10% ideal
- Five-year eps Growth - must be positive, above 10% ideal
- Debt to ebitda ratio - some exceptions for capital-intensive companies and pharma but otherwise ideal is 1.5 and below, 2.5 is a worry sign, 3.5 is do not buy
- Payout ratio - below 70% with a few exceptions such as utes, MO. Ideal is below 50%
- Consecutive Years raising the dividend - when buying for dividend income, 5-year minimum. 15 years of not cutting is ideal to take the Great Recession into consideration
I use those numbers to set a target price for each stock. To date I have been buying for dividend income and have always looked for a price between a 15 and 20 PE and use the above numbers to decide what multiplier I want to use. For a company like LMT with double-digit earnings and dividend growth I'll use closer to a 20 PE. For a company like PM I'll be more in the 15 range. There are some sector PE differences.
I include these in my screen for awareness:
I used to avoid high beta companies but don't any more. I just want to be looking for them at the low end of their cycle and be aware they may move a lot. I have become more open to mid-cap companies.
Now I don't buy based on all of this - it's a screen. When a company is close to or below my target price I do what I call my deep dive. At the very least this involves going to the company IR site and looking over the last 5 ARs and reading the latest one through. Then I write down cash flows and calculate the 5-yr cash flow/revenue growth. There are quite a few companies with good eps growth numbers where much or even all came from buybacks. I want growing companies and for me this means cash flows.
Once I've done that I firm the price up or, sometimes, make it a no buy.
Also, there are no absolutes. I will pay what I call a premium for a company I consider worth it. So I try to stay at or below a 20 PE but can go above it and sometimes a company taking on debt through an acquisition can actually be a reason to buy. For the past 3 years I have tried to only buy companies with a minimum of a 2% yield as I was close to retirement but have made a couple of exceptions there as well.
I do not have a set algorithm though. I have a range and get a feel for the company, then go with a price. I also have some Seeking Alpha Blog Posts on this process. This is the most detailed, and longest: seekingalpha.com
I'm about to start buying for my IRA which will be a TR account, not for dividend income to live on. The screen will be very similar but some of the metrics to set a price will look different. In fact next time I run it I plan to have two price columns for each company; a Taxable Account (dividend) and IRA (TR) price. And some companies that look good for one will be worthless for the other. |
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