A Valuation Exercise: The Dividend Achievers and Price to Sales

Want to identify a list of stocks to further analyze? This can be a tough thing to do given the huge number of stocks that exist. How do you decide which ones to focus on? Is there a quick way of doing an initial screen of companies that warrant the extra time to do a full and thorough analysis on? Last week, I presented one such method in the post title,”A Valuation Exercise: The Dividend Aristocrats“. This post used the High Yield Dividend Aristocrats as a starting point and weeded out the ones with the most potential value by using the current dividend yield and the 5 year historical dividend yield. This week I am going to do something similar but looking at another valuation metric and universe of stocks.

Getting a List of Stocks to Start With

This week we are going to grab the list of the Mergent High Growth Rate Dividend Achievers Index as opposed to the high yield Dividend Aristocrats. The difference between these two lists is the number of years that companies have raised their dividends. The Aristocrat companies have an uninterrupted 25+ years of dividend increased. The Achievers have an uninterrupted 10+ years of dividend increases. The benefits of using the Achievers is the universe of stocks is larger. The downside is the companies may have not raised their dividends as long as the Aristocrat companies have. My choice would be to use the Aristocrats, however for the purpose of this exercise I want to show another universe of stocks to use. Here is how to get the list of Mergent High Growth Rate Dividend Achievers Index:

1. Direct your browser to http://www.dividendachievers.com.
2. In the left hand sidebar, hover your mouse over High Growth Rate Dividend Achievers and select Constituents
3. Unfortunatley Mergent’s does not provide an export to Excel feature on their website, so you need to copy and paste the list of companies into Excel.

This will give you a good list of companies to start with – proven companies that are in the habit of raising their dividends at a high growth rate.

Sorting the List by Dividend Yield

The next step is to sort this list of stocks by dividend yield. For the purposes of this exercise I want to focus on those with the highest yield as a starting point. The further analysis I do later will help verify if this high yield is manageable and not some sort of huge weird anomoly that the company will not be able to sustain. However, at this point I just want to get a starting point.

As with the excersise last week, this step can be a bit tendious as you need to go to a site such as The Motley Fool and look up each ticker and record the dividend yield. However, if you are industrious there are ways to automate this using Excel.

Once you have all the dividend yields recorded, simply sort the list from highest yield to lowest yield and highlight the top 10 on the list.

Run a Quick Valuation Exercise on the Top 10 High Yield Achievers

The next step requires some more internet research, but as internet addicts we relish the opportunity to use the web for fun and profit (right?). The valuation metric we are going to use in this excersise is the price-to-sales multiple. Before I explain the steps, I want to talk about the P/S metric.

Price-to-sales (p/s) is defined as:

A stock’s capitalization divided by its sales over the trailing 12 months. The value is the same whether the calculation is done for the whole company or on a per-share basis. A low price to sales ratio (for example, below 1.0) is usually thought to be a better investment since the investor is paying less for each unit of sales.

It has been shown as a good metric to use to screen for value. This chart from Stingy Investor with data provided by David Dreman shows the impact of a low P/S on share investment performance:

Click to Enlarge

The steps to follow to get the P/S for our top 10 high yield Dividend Achievers is as follows:

1. Go to http://caps.fool.com/
2. In the search box, enter the ticker symbol fo the stock you want data for
3. Click on the “Ratios’ tab
4. Find the Price-to-sales metric
5. Record the P/S metric on your Excel spreadsheet

Do this for all 10 stocks until you have the P/S metric for all 10 stocks on your list.

Look for Stocks with A P/S Less Than 0.50

Research suggests that stocks with a P/S of less than 0.5 represent a value to investors and are trading at a discount. Those stocks on the list that have a P/S of less than 0.5 are great candidates to conduct further analysis on. Sometimes you will have zero stocks on the list and other time you will have more than 8. The key thing is that you now have a short-list of stocks to conduct further fundamental analysis on and have saved a great deal of time doing it.

A Caveat

This process is NOT a buy screen – it DOES NOT generate a list of stocks to go out and buy. It is only one way to identify companies for further analysis. Please do keep that in mind.

I hope you have found value in these two valuation and screening posts. Please let me know if you have other ways and metrics to screen for stocks. My readers would love to hear it!