Over the last several weeks I have alluded to the fact that my stock analysis model was going through a major overhaul. Last week I put put the last piece of the puzzle in and began using the new model with the United Technologies Corp. (UTX) dividend stock analysis.
I would not say the old model was broke, but it had too many moving parts. It usually got to the right answer, but not always in a logical manner. Sometimes the model did not get to the right answer and I would have to manually override it. So, what’s new in the updated model?
I. Five and Only Five Stars
In the old model a stock could end up with more than five stars or less than zero Stars, based on an elaborate system of adding and subtracting of Stars. In designing the new model, I eliminated the situations where a Star was deducted and focused on the four most important characteristics of a good dividend stock, each was worth a Star. I then rolled four lesser characteristics into the fifth Star. The following will now earn a Star:
- Fair Value: I look at five measures of fair value: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price, 4.) Graham Number and 5.) NPV MMA Price. Of the first four, the highest and lowest fair values are excluded and the remaining two calculations are averaged to calculate the Mid-2 price. Then I compare it with the NPV MMA Price and use the lower of the two.
- Free Cash Flow Payout: A Star is awarded if the Free Cash Flow Payout is less than 60% and there were no negative free cash flows during the last 10 years.
- Debt To Total Capital: Having less debt provides a company more financial flexibility. A Star is awarded if the Debt To Total Capital is less than 45%.
- NPV MMA Diff: The value calculated is the net present value (NPV) of the difference between the dividend earnings of this investment and the interest income from the MMA over 20 years. A Star is added for amounts in excess of the target amount.
- Key Metrics: “Dividend Growth Rate”, “Years of Div. Growth”, “Rolling 4-yr Div. > 15%” and “Years to >MMA” are considered Key Metrics. A Star is awarded if 2 of the 4 Key Metrics are true.
II. A Sliding NPV MMA Diff Target
Previously there were three targets: $2,500 for companies that have raised dividends for 25 or more years, $7,500 for those between 10 and 25 years and $10,000 for those less than 10 years. This created cliffs. For example a company that has raised its dividend for 24 years had a target of $7,500 this year, then it would go to $2,500 after the next increase. In the new model, I use annual dividends, not cumulative so the numbers are smaller. Also, I implemented a sliding target based on the number of consecutive dividend increases going from a low of $500 (for 30 or more years) to a high of $3,500 (for no increases). Each year increase moves the scale by $100 between the low and high values above.
III. Other Relevant Information
In addition to the above, I added other relevant information for the readers consideration, such as the Risk Rating.
The end result is a more streamlined model focusing on what is important when identifying stocks that could be great dividend investments. One additional benefits is that the new Star calculations can occur on the fly. Thus, I can always see an up to date Star rating on my dashboard for each of the stocks I follow. At the time of this writing, the following stocks rated as 5-Star Strong Buys:
- Automatic Data Processing Inc (ADP) – Yield: 3.74% – Analysis
- AFLAC Inc (AFL) – Yield: 3.81% – Analysis
- Chubb Corp (CB) – Yield: 3.61%
- Dover Corp (EMR) – Yield: 3.10% – Analysis
- Emerson Electric Co (EMR) – Yield: 4.15% – Analysis
- Johnson & Johnson (JNJ) – Yield: 3.45% – Analysis
- McDonald’s Corp. (MCD) – Yield: 3.48% – Analysis
- Nucor Corp (NUE) – Yield: 3.32% – Analysis
- Paychex Inc (PAYX) – Yield: 4.83% – Analysis
- Procter & Gamble Co. (PG) – Yield: 3.13% – Analysis
- Sysco Corp (SYY) – Yield: 4.22% – Analysis
- United Technologies Corp (UTX) – Yield: 3.07% – Analysis
The ability to see updated ratings and key metrics on the 86 stocks that I currently follow allows me to more closely gauge the best time to buy (or sell). More on this tomorrow.
Full Disclosure: Long AFL, JNJ, MCD, NUE, PAYX, PG, SYY, UTX. See a list of all my income holdings here.