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Wed. Nov. 7, 2007 D4L process

Dividend Analytical Data

Last week I posted a Stock Analysis on PAYX including a link to a PDF containing a detailed analysis. In this article, I will explore the section titled Dividend Analytical Data (located in the top center section of the above linked PDF). This section evaluates certain attributes of a dividend investment that I consider relevant. Below is a description of each item in the Dividend Analytical Data section from page 2 of the detailed analysis:

Rolling 4-yr Div. > 15%:
Dividends will double every 5 years if they grow by 15%. This test is TRUE, and a Star is added, if dividends grew on average in excess of 15% for each consecutive 4 year periods, within the last 10 years of history.

Dividend Growth Rate:
The minimum dividend growth rate of the 1, 3, 5, 7, 10 year dividend growth rate or 15%, if “Rolling 4-yr Div. > 15%”. A Star is awarded if the dividend growth is 15% or greater.

Years of Div. Growth:
The number of consecutive years of dividend growth. A Star is awarded for consecutive growth in 10 or more years. A Star is deducted if the number of
years is less than 5 years.

1-Yr. > 5-Yr Growth:
This test identifies if dividend growth is accelerating. A Star is awarded if the 1-year dividend rate growth exceeds 5-year dividend growth rate.

Payout 15% of avg.:
This test identifies companies who have significantly increased dividends paid as a % of earnings. A Star is deducted if the current dividend payout exceeds the 10-year average by 15 points (+15%).

Rolling 4-yr Div. > 15% is one of my favorite attributes. This test evaluates the consistency of dividend increases over the last 10 years. If you are only looking at a 10-year average, a stock could double its dividend in the first year, grow it by 6% in the subsequent 9 years and end up with an 10-year average growth rate of 15.4%. However, that scenario would fail the Rolling 4-yr Div. > 15% test. A Star is added, if the result of this test is True.

For the Dividend Growth Rate I have opted to take a conservative route. I calculate a 1, 3, 5, 7, 10 year compound annual growth rate and assume the lowest value. However, if that amount is less than 15% and the Rolling 4-yr Div. > 15% test is true, I use 15%. By considering the Rolling 4-yr Div. > 15%, a company in a cyclical industry is not unduly penalized for having a single down year, when it has a history of being a strong performer. A Star is added if the dividend growth is 15% or greater.

We all want a raise each year from our employer. The same should be true for the companies we invest in. One of the most important aspects of a dividend stock is its ability to consistency raise dividends over time. Years of Div. Growth looks back and counts how many consecutive years the company has raised it dividend. A Star is added for consecutive growth in 10 or more years, while a Star is deducted for less than 5 years.

If growing dividends at a consistent rate is good, then growing dividends at an accelerated rate is excellent! The 1-Yr. > 5-Yr Growth test rewards companies when their last dividend increase that was in excess of the its 5-year compound annual growth rate. A Star is added to companies that pass the 1-Yr. > 5-Yr Growth test.

Most dividend companies understand the importance of a consistent dividend. When times are tough, most well-established dividend companies will attempt to maintain their dividend policy, even if it means paying out a higher percentage of their earnings. The Payout 15% of avg. test penalizes companies that have raised their dividend payout in excess of their 10-year average by 15 points (+15%) by deducting a Star. This does not necessarily mean a company is bad, it just merits further attention. It is a positive sign, if the company is willing to maintain its dividend policy during a short-term downturn. It is up to you to determine if the downturn is short-term or if something has fundamentally changed.

When evaluating a company’s dividend attributes, what do you consider to be the most important?

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