Since I first reviewed Intel a few weeks back I've been working on a way to analyze a stock and quantify it in order to rate if its an attractive buy. I've come up with something that is a strong foundation, but this may be tweaked in the future.
When analyzing a dividend stock there are three aspects we are concerned with: dividend reliability, dividend growth, and fair value.
Dividend Reliability A stock's dividend reliability is determined by its dividend payment history as well as its current financial health. Total of 4 points available.
- # of Consecutive Dividend Payments - The longer a company has been paying a dividend, the more ingrained the dividend payment is part of the company culture and the less likely it would be removed. 10 to 25 Years = 1 Point
More than 25 Years = 2 Points
- Cash Flow Payout Ratio - Cash flow payout ratio is like dividend payout ratio accept this is the percentage of cash flow that is paid out as dividends. The lower the better.Less than 60% = 1 Point
- Debt to Total Capital - Too much debt can hinder dividend growth as cash is going to debt and interest payments. Debt includes both long-term and short-term debt and can easily be found on the liabilities side of the balance sheet. Total capital is a combination of debt and shareholders equity. When you divide debt by total capital we want a rate less than 45%.Less than 45 % = 1 Point
- # of Consecutive Dividend Increases - The longer a company has been consistently raising a dividend, the more ingrained the dividend increase is part of the company culture and the less likely it would be changed.
10 to 25 Years = 1 Point
More than 25 Years = 2 Points
- 1 Year Cash Flow Payout Ratio <= Avg 5 Year - A cash flow payout ratio that is going up tells us that dividend payments are eating into the company's bottom line. This could signify a slowdown in dividend growth in the future or a slowdown in the companies earnings. Ideally we'd like the ratio to be less than or equal to the average 5 year payout ratio.1 year cash flow ratio <= avg 5 year = 1 Point
- 1 Year Dividend Growth Rate > Avg 5 Year - If the 1 year dividend growth rate is higher than the average 5 year, then we know the dividend growth is accelerating. 1 year dividend growth rate > avg 5 year = 1 Point
- Current P/E < Avg 5 Year P/E - If the current P/E (price divided by earnings) is less than its average 5 year P/E, then we are getting the stock cheaper today than in the past.Current P/E < avg 5 Year P/E = 1 Point
- PEG < 1.5 - The PEG ratio (Price/Earnings To Growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth. The lower the ratio the better.PEG < 1.5 = 1 Point
- 9-10 Points: Very Strong Stock
- 7-8 Points: Strong Stock
- 5-6 Points: Hold, revisit in within a year
- < 5 Points: Weak Stock, revisit after a year