This week’s video is not a regular stock pick. The DSR Stock Cards are one of our members’ favorite tool at my membership’s website: Dividend Stocks Rock. This video should help you out in understanding all the strategy behind and why they have been built that way. I also thought it could be useful for you as it can also help you building your own investment strategy and analysis process.
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00:02 Mike Heroux: Hi everyone. This is Mike Heroux from Dividend Stocks Rocks. Today I’m doing something a little bit different than usual for my weekly video. It’s actually a tutorial to explain one of our most successful and most used tool at DSR, which is the stock cards. We have created stock cards. Those are two-pagers analyzed for each companies that we follow at DSR and members of, also the possibility to request stock cards being made on pretty much any dividend growth stocks on the market. In order to do so, they just send us an email and then we add it to our worklist and within about like maybe five or six weeks, we are able to pull it out, because we are updating all stock cards twice a year and we add on average of six, seven new stock cards each week as well. Those are being sent on Fridays. I’m gonna share my screen with you, and I’m going to do a quick tour on how to look at these stock cards, how to understand it, and how it basically works.
01:12 MH: There you go. Let’s do it that way. Now we are on the website. If you select the stock card, you have the option between the US and the Canadian. All stock cards are protected by your membership. If you’re not a member of DSR, you will not have access to those pages. If you go down here, you have all the stocks that you do, so you can sort them through symbol or ticker if you prefer. You can sort them through names as well, or you can pull out a search. Let’s check here and I’m going to pull out for Gentex because this is one of my favorite company at the moment. So you have basic information, but this is not what we’re looking for. We wanna look at the stock cards, so pulling out the stock cards, I’m gonna zoom in a little bit on this one. The first thing that you see here right on the corner is the date that the latest update of the analysis. So this one was done in August.
02:16 MH: You basically have the business model. So basically, in a few words, we’re trying to explain to you what the business does. Obviously, it’s not a lengthy and complex definition, but it should be enough for you to understand what’s happening with this company and in which field it’s working. On your right side, you have our pro-rating. Pro-rating is a basic rating that we have. It is explained in the website, so it basically goes from one to five. So from a streaming sale that it is a one, as an exceptional buy as rated as a five. So it’s a classic buy-hold-sell rating.
02:55 MH: We also have a dividend safety score right here. Dividend safety score of one means that the company has recently cut or is about to cut its dividend. At two, you have a dividend with no growth and most likely going to be cut at one point in time. If you go at three, then you have a dividend that will likely follow the inflation, I mean a dividend growth rate obviously, and then dividend four and five meaning that the company is shareholder-friendly, wants to increase its dividend in an important matter going forward. Then you have a small comment if the company is fairly valued, overpriced, or underpriced as well, and we’ll have more explanation with the dividend discount model just below. So a company in a nutshell, those are three points basically just giving you a quick picks of what is Gentex is about, and then you move on to our investment thesis.
04:00 MH: It’s important to understand that the result of this two-pager document is most likely coming out from 12 to 15 pages of research. So we’re trying to condense everything. We try to make the best summary as possible, because the point of DSR is helping you making an efficient decision, not having you reading like 5000 words each time you wanna look into a company. Basically it’s just to give you a quick overview. But fear not, we have major research on the background, and we have written a lot of things before going to that investment thesis, which is only a few lines. Then you move to the final part of the first page, which is the valuation. We use the dividend discount model with two dividend growth rates. The first one here, it calculates the value of the growth rate for the first 10 years. So, depending if the company is doing well or not, we’re going to adjust it according to that. Right now we have used an 8% dividend growth rate for the first 10 years, and then we also use a terminal dividend growth rate, meaning that starting from year 11 and forward we usually take a smaller growth rate because we want to remain cautious and conventional in our analysis.
05:21 MH: Now, going to the metrics, what you have here is you have the value according to the discount rate. The discount rate is the rate of return that you expect on your investment. So if you expect a rate of return of 9%, and you assume a high single digit dividend growth rate, the intrinsic value, so the value you should pay for a Gentex in order to receive that 9%, should be around $25. After that, you have the premium, so meaning that if the stock’s price right now trades around $28, $29, that means that’s you’re paying a 10% premium on it. On the other way around, if the stock’s price is around $23, then it means that you have a 10% discount on what you believe should be the intrinsic value. Keep in mind that as any valuation model, the dividend discount model is not perfect. It has several flaws. We have covered it into a longer webinar. Just keep in mind that this is just an indication. I would never trade based on the valuation given from the dividend discount model. I think that the investment thesis and the dividend safety score is a lot more important.
06:37 MH: So from time to time, you will see undervalued stocks rated as a two, a sale, or rated as a three as a hold, because there are other reasons why we think that; Yes, on the one side, the dividend discount model gives us an attractive valuation, but overall, the company doesn’t meet our growth vectors, doesn’t meet our other investment thesis or fundamental inside a company, so it’s not worth our money or our time.
07:09 MH: Now moving forward to the second page, this graph is being updated about twice a year. So we show what we call the “dividend triangle.” Basically we are looking at a company’s growing revenue, growing their earnings in order to be able to grow their dividend. What you see here is revenue, earnings, and dividend. The three lines are shown on this graph. It shows you the trend over the past five years. It gives you an indication of what’s going on from time to time depending on what’s happening with tax regulation and so on. You will see earnings per share, for example, going up or down suddenly. So this gives you just a hint that you have to do further research. You have to dig into the quarterly reports, and most of the time we will explain the variation on the stock card.
08:01 MH: Now moving on to the metrics, we have type of holdings. At DSR, we divide them into a specific type of holding, so either growth, so you’re holding those companies with sometimes will show more volatility, a little bit more risk, but higher potential for stock value growth, so stock value appreciation. And you also have the other type of holding which is core, which is most likely the type of classic dividend holding, like “sleep well at night.” A company like Coca-Cola, for example, will fall into the core sector because we don’t expect much growth from it, but you do expect steady dividend growth and a small stock price valuation going on. We also mentioned the sector, so it’s always interesting if you look at your sector allocation. You wanna make sure that you don’t put too much companies into the same sector, this is why we mention it here. Current dividend yield P ratio, those are common metrics. On the other side, you have the five-year revenue earnings and dividend growth. Those are annualized rates. So this means that Gentex shows a revenue growth rate of 10%, year after year over the past five years.
09:21 MH: So obviously, it could be like 12 for one year, 15 the other, and then 8th, but it goes down to the equivalent of 10% each year for that five-year period. As you can see, those are pretty strong numbers obviously, and this is why Gentex is rated as a five in terms of a pro-rating. You have the payout ratio. This is based on accounting numbers. So basically we just follow what happens to the earnings, not the adjusted earnings. This reflects the accounting payout ratio. So this from time to time will show a very high payout ratio over 100%, and then you’ll read the dividend grow perspective, and you’ll find out that those, the dividend payment is safe and everything is fine. So this means that we have dug into the quarterly statement, into the annual statements and find out what was the adjusted payout ratio was, and then we determine that it was a good pick or not.
10:21 MH: Now, second to last section, potential risk. Even though we really like Gentex, there are also competitors. There are also risks around this company. So we have to disclaim it. So this is why we describe all the… Everything that could potentially go wrong in this one, so you know exactly what to expect and you know where the risk could be coming from. And finally, dividend growth perspective. This is where we’re going to tell you how many years the company has been increasing its dividend, year after year, what to expect in the future. So with this one, you can expect a high single digit dividend growth numbers for the next decade. We explain a rationality behind it, so it gives you a little bit more information on how we use the DDM in order to calculate our evaluation at the same time.
11:14 MH: I hope that you have enjoyed this short video explaining the stock card. If you have any questions, just send us an email. I’ll be very happy to help you out with those. Once again, we update those stock cards twice a year. If you have any companies that you don’t see at DSR that you would like us to review, send us a quick email, we add it to our worklist and get our team working on it and then we just publish a few weeks later. That was it for this one. So happy investing and see you during our next video. Cheers.Google+