Valuation of a company is a subjective and difficult thing to do. That is why I think it is important for individual investors to develop a system using a couple of different valuation metrics to gauge if a stock is show some value or if it is overpriced. My numbers will differ from your numbers. It all depends on the inputs we put into the analysis. The digging I did with respect to revenue, EPS, the ratios, ROE, and dividend growth will help with this step.
My valuation process starts by looking at five different metrics to see how the stock is priced in relation to historical share prices. These five methods, and the scoring system I use are presented below:
|Valuation Metric||Criteria||Value||Score (Pass=1 / Fail = 0)|
|Dividend Yield||Cur Yld > 10 Yr Avg Yld||0.9%||1.0|
|Div Yld Compared to SPY Div Yld||Cur Yld > SPY Yld (0.25)||2.20%||0.0|
|P/E Ratio||Cur P/E < 10 Yr Avg P/E (1.0)||33.9%||1.0|
|Relative P/E||Relative P/E < 1.0||0.44||1.0|
|Price to Sales||< 1.5||1.8||0.0|
|Total Ratio Score||3.0|
Each of these four methods looks at the share price to today, and compares it to an average share price over the past 10 years. For example, I determine the average 10 year dividend yield and see if the current dividend yield of the stock is higher or lower than that number. If it is higher, than that suggests the stock is undervalued. If the stock has a lower yield now then in the past 10 years, then the stock may be overpriced. Of course there may be a lot of factors that can influence the results of this metric such a recent special dividend or something. That is why I don’t just use one valuation metric and look at other metrics such as Price-to-sales and relative P/E.
I also rely heavily on the CSA software I use to determine a buy range for the stock. This software takes revenue, EPS, P/E, and other inputs to determine a buy range for the stock. If the company is trading in this buy range, then I consider it a buy. Of course all the other analysis I have done must be good before I buy. Here is how I score this piece of information:
||Current Price||Rating||Scoring (Buy=1.0, Other=0.0)|
Wow, that was a lot of writing! This post and the last couple of posts in the process series should have provided you will a clear picture of my process for evaluating individual dividend stocks. In the next post I will move away from analysis and talk about how I evaluate how I have done – benchmarking my portfolio results.Google+
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