Selecting Dividend Stocks With The Dividend Analyzer: How It Works
Selecting dividend stocks can be difficult and time consuming. The Arbor Dividend Analyzer provides a time saving approach to discover, compare, and evaluate dividend stocks without emotional bias.
The Arbor Dividend Analyzer is a comprehensive spreadsheet which combines key quantitative and qualitative metrics. Our database includes the top 350+ dividend paying companies. Each stock earns a Dividend Safety, Profitability, and Valuation Score. Each of these make up one-third of the Total Score for the stock.
The Dividend Analyzer Total Score focuses on eight key metrics. When combined properly, these key metrics are powerful indicators of future returns! Keep in mind there is no perfect set of metrics. However, I carefully picked these metrics individually and, more importantly, as a group.
The great benefit of the Arbor Dividend Analyzer is that you can quickly find, compare, and evaluate dividend stocks without emotional bias. The combined Total Score provides a solid quantitative approach with which to compare large groups of stocks.
Dividend Yield = Current Dividend Annualized / Stock Price
Historically approximately one-half of long term stock market returns are delivered through dividends. Dividend are real, they can’t be faked or brought about by fraudulent accounting.
If a stock has a low yield I want to know if it’s because the stock is overpriced or if and why the company is not returning enough to shareholders.
If a stock yield is high I want to have a clear understanding of what negatives are causing the price of the stock to be low. Does the high yield compensate the shareholder for whatever risks are in the price of the stock?
The following sections: Dividend Safety, Profitability, and Valuation; provide a multifaceted and well-informed view of the important metrics to consider before deciding whether to continue further research of a particular dividend stock. Each metric is followed with the maximum points toward its section and total scores.
Dividend Safety Score
The objective of the Dividend Safety Score is to measure the safety of a company’s current dividend and provide a score that can be compared with other companies.
Cash Dividend Payout Ratio: (12 points)
We use the Cash Dividend Payout Ratio because it is a far superior metric than the commonly used payout based on earnings. The cash dividend payout ratio takes into account the cash required to fund capital expenditures and preferred dividends, both of which need to be paid before the common stock dividend.
In addition, the cash dividend payout ratio uses cash flow from operations; a metric that can’t be manipulated (as reported earnings often are). We want to insist on safety but also pursue dividend growth. A low cash dividend payout ratio gives us the potential for both safety and the ability for the company to grow the dividend.
Net Financial Debt to Total Assets Ratio: (12 points)
Net Financial Debt = Financial Debt (Long Term Debt + Current Portion Debt + Dividends Payable + Notes Payable)
– (minus) Cash and Short-Term Investments
Comparing Net Financial Debt to Total Assets tells us how much the corporation’s assets are leveraged after accounting for their liquid assets. Net financial debt is more accurate and more important than ever because of the corporate trend to leave cash overseas and borrow domestically.
The higher the ratio the more leveraged the company and the greater the probability of adverse conditions affecting the dividend in a negative manner. A negative number means the company has more cash than debts. Everything else being equal, these companies carry less risk of dividend cuts.
Piotroski F-Score: (9 points)
The Piotroski F-Score is made up of nine components. A pass is worth 1 point and fail worth (0). Here are the components grouped in order: Profitability, Capital Structure, and Operating Efficiency.
Net Income > 0
Cash Flow From Operations > 0
Higher ROA Than Previous Period
CFO > NI
Decline in Long Term Debt
Higher Current Ratio Than Previous Period
Number of Shares of Stock < Than Previous Period
Higher Gross Margin Than Previous Period
Higher Asset Turnover Than Previous Period
Note that 6 of the 9 components are trending metrics. This makes the Piotroski F-Score a volatile but sensitive indicator of a company’s current direction.
I deliberately placed the Piotroski F-Score in the Dividend Safety section because the score can move fast (up or down). Low scores could be an early indicator of possible future problems. Conversely, high f-scores would mean a low probability of a dividend cut.
The F-Score has a proven record as an indicator for a company’s future stock performance. Groups of stocks with a 7, 8, or 9 far outperform groups of stocks with a 0, 1, 2, or 3.
Total Dividend Safety Score: (33 points)
The objective of the Profitability & Growth Score is to measure and compare the Profitability of a company and provide a score that can be compared with other companies.
Operating Earnings Yield (OEY): (15 points)
Operating Earnings Yield = Operating Earnings (TTM) / Market Capitalization
Operating Earnings Yield (OEY) is one of my favorite metrics because, by using market capitalization as the denominator, it compares operating earnings to the price you are paying for the stock (or the current price). The price today is what really matters to you as an investor. Therefore, using market capitalization is superior to metrics that use shareholder equity as the denominator.
In addition, the numerator uses operating earnings, instead of net income, which removes much of the “noise” from the metric. In other words, operating earnings excluding taxes, non-operating income and expenses, discontinued operations, extraordinary items, etc. Many analysts conclude this is a more accurate view of the company’s ability to create earnings.
Gross Profitability Ratio= Gross Profit to Total Assets: (18 points)
Gross Profit to Total Assets = (Revenue – Cost of Goods Sold) / Total Assets
Gross Profitability Ratio is a profitability and efficiency ratio researched by Robert Novy-Marx to identify stocks that outperform the market in the long run. It measures the amount of profit a company generates for each dollar of total assets.
We want to buy stocks at bargain prices, but we want to buy quality companies. The Gross Profitability Ratio uses gross profit (the basics of what a company does) and matches it with the amount of assets required to produce the profit. This is a high probability metric for indicating companies with sustainable competitive advantages.
A high Gross Profitability Ratio is evidence that a company has sustainable competitive advantages. Otherwise competition would enter their market and lower their profits. The fact that they have above average profits means they are able to achieve a premium or favorable position over their competitors.
Total Profitability Score: (33 points)
The objective of the Valuation Score is to measure and compare the valuation of the company stock and provide a score that can be compared with other companies.
Free Cash Flow Yield (FCFY): (15 points)
Free Cash Flow Yield (FCFY) = Free Cash Flow / Market Capitalization
Free Cash Flow Yield (FCFY) = Free Cash Flow Per Share / Stock Price
Free Cash Flow Yield (FCFY) provides the relationship between the stock price and the amount of cash that is left over from operations after the company completes its capital expenditures. Another way to look at it is that Free Cash Flow is the money available to pay dividends without using reserves or borrowing.
This is a key metric because it tells you a great deal about the health of the company AND the valuation of the price you are paying for the stock. In other words, it indicates the percentage return of free cash flow the company is generating compared to the price of the stock.
EV to EBITDA (Acquirer’s Multiple): (18 points)
EV to EBITDA = Enterprise Value / Earnings Before Interest Taxes Depreciation & Amortization
EV to EBITDA takes another level of income (Earnings Before Interest Taxes Depreciation & Amortization) and compares it to the total value of the company (enterprise value).
Enterprise value is a key metric for value investors because it represents the total value of a company and is capital structure neutral. It measures the value of the assets that produce the company’s product or service. In other words, it has an economic value that includes the equity capital and debt capital of the enterprise.
If you don’t have a clear understanding of Enterprise Value ratios I suggest reading: Enterprise Value (EV) & Calculating Enterprise Value Ratios.
Total Valuation Score: (34 points)
Total Dividend Analyzer Score
Note: We measure profit at three different levels (gross profit, operating profit, and free cash flow). We use three different valuation metrics (earnings yield, free cash flow yield, and EBITDA to EV).
The Dividend Analyzer Total Score focuses on eight key metrics; when combined properly, these key metrics are powerful indicators of future returns! A perfect total score would be 100. The average stock score in the database (approx. 370+ stocks) is 50. This gives you a reference point when comparing different stocks. Scores above 50 are above average, and scores below 50 are below average.
The total score takes into account key metrics from the Balance Sheet, Income Statement, and Cash Flow Statement. They are combined in different ways (ratios) so that they present the metrics that are important to paying and growing dividends for shareholders.
Ultimately we want to find companies with safe dividends, high profitability, and whose stock price is a bargain. The Dividend Analyzer allows us to examine the appropriate metrics without the emotional bias that we all have when looking for stocks that we “like”.
Many times the most “unpopular” stocks are the best opportunities. We initiate our research with “blinders” on. Our quantitative analysis allows us to discover, evaluate, and compare stocks without emotional bias. Our three DVB Newsletters will assist you in finding the best stock opportunities for your portfolio!
Discover, Compare, and Evaluate Dividend Stocks
Dividend Analyzer Newsletter: Analyze Dividend Safety, Profitability, and Valuation without emotional bias.
Treasure Trove Twelve: Find the Hidden "Gems" in the Midst of 1000's of stock choices. DVB Database Sector Analysis.
DVB Portfolio Newsletter: Six Portfolios: 3 Stock Portfolios and 3 ETF Portfolios. Email Notification of Portfolio Changes.
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