DGI Adventure – 11-22-2015 “High” Yield Quantitative Watch List – Honorable mentions

In my
previous post
, I highlighted the stocks from David Fish’s CCC list
(Dividend Champions, Contenders and Challengers)
passed all 10 out of 10 quantitative criteria designed to filter out stocks
that are trading at a discount to their historical price in spite of strong
financial positions. 9 stocks emerged.

Now with ~$9K in cash to invest, we’re looking at a maximum
of 6 stock purchases, so I could have stopped there. But another 13 stocks were
close, passing 9 out of 10 of the criteria (in a few cases 8). 9 out of 10 isn’t
too bad, and a number of them only barely missed the target metric. So I feel
like they deserve mentioning.

Now Presenting: The “High”
Yield Quantitative Watch List – Honorable Mentions

It’s worth noting that a lot of these missed in the same
criteria categories…either not having a net positive cash position (or $1B), or
not quite meeting the cash flow CAGR metric. Only one had a dividend cushion
ratio less than 1.0. So here we go, listed again roughly according to yield and
consecutive dividend increases:

Stock #1 Seagate
Technology Public Limited Company (STX) – Current Share Price $34.41

Seagate missed the top-tier cut because of its current debt
to market cap of 42%. Considering the stock is down almost 50% for the year,
this is a relatively recent issue. Mr. Market’s sour opinion has obliterated ~$10B
of market capitalization. The company just cracked the CCC list having raised
dividends for only 5 consecutive years. Any time a stock yields over 7%,
caution is warranted. But their cash flow situation is incredibly strong…for
now. The future of hard disk drives is bleak, so Seagate will need to adapt if
it’s going to stick around the CCC for the long haul, but the current cash
situation is pretty positive.

Stock #2 Eaton
Corporation plc (ETN) – Current Share Price: $57.59

Eaton just barely missed out because of its total cash
position. Their total cash of $568M is slightly less than their debt of $867M…and
it’s not $1B. Considering TTM cash from operations was $2.5B, and dividends +
investments only amounted to $1.5B, they certainly could have $1B in cash if
they wanted to (they’ve been buying back stock and paying down debt instead). This
Irish industrial goods company’s profile describes them as a “power management
company”. They make, sell and service high-end industrial equipment. They’ve raised
dividends for 6 consecutive years to an average tune of 11.2% DGR. Sounds promising
to me.

Stock #3 QUALCOMM Incorporated
(QCOM) – Current Share Price: $49.62

QCOM only had a 5 year Operating Cash CAGR of 2.94% against
a target of 5% or better. It’s worth noting the 10 year CAGR is 6.9%. They just
wrapped up their fiscal year at the end of September and 2015 financials were
almost universally down compared to 2014, which has been reflected in a share
price drop that’s only slightly less drastic than Seagate’s. QUALCOMM is facing
market share issues as the mobile device chip market has gotten very
competitive. In spite of those headwinds, 13 years of consecutive dividend
increases and a healthy balance sheet are compelling reasons to keep an eye on
this company.

Stock #4 Nucor Corporation (NUE) – Current Share
Price $41.32

It almost isn’t fair that Nucor missed the first list. The
only issue with their metrics was that the debt to market cap is 33.62% against
a target of 33%. With the current global commodities environment, a steel
manufacturer is likely facing tough times. But the company has raised dividends
42 consecutive years, so this isn’t their first rodeo. They’ve increased the
dividend an average of 20% per year over the last 15 years. The current reverse
DDM DGR based on the share price is 6.4%. That is a big divergence.

Stock #5 Cohen &
Steers Inc. (CNS) – Current Share Price $30.69

CNS’ 5 year cash from operations CAGR was a meager .37%. The
company’s operating cash flow is very irregular. Since 2005, operating cash
flow has been the following (in millions): 50, 5, 117, 35, 22, 54, 72, 20, 76,
55, 104 (TTM). That’s a weird pattern. They’re a relatively small investment
management company, but they have zero debt, which is probably a good thing for
a company with unpredictable cash flow.

Stock #6 Lazard Ltd.
(LAZ) – Current Share Price $44.89

Lazard’s $900M in cash was just shy of the $1B mark, and
less than their $1.2B in debt. Other than that everything looks very strong.
Although there is something inherently shady about a financial advisory and
asset management firm based in Bermuda…the $1.40 dividend isn’t subject to any
kind of foreign withholding taxes, and it’s been raised for 8 consecutive

Stock #7 Miller Industries
Inc. (MLR) – Current Share Price $22.24

Miller also had a very weird pattern to their operating cash
flow over the last 10 years. The actual 5 year CAGR was technically negative,
although not if you look at 2011 to TTM. This Tennessee based company makes and
sells tow trucks and vehicle carrier trailers all over the world. Well how
about that. They also have zero debt and have raised dividends 6 consecutive

Stock #8 Eaton Vance
Corp. (EV) – Current Share Price: $37.46

The 5 year cash flow CAGR of only 0.63% was Eaton’s issue
for this analysis. If we shift the frame of reference to 2011 to TTM instead of
2010 to 2014 they have a 5 year CAGR of over 10%. 2014 was kind of a down year
for this mutual fund company. (Full
disclosure: long 45 shares with a cost basis of $33.40/share)

Stock #9 Fastenal
Company (FAST) – Current Share Price: $39.71

Fastenal’s $111M in cash is less than its $315M in debt. But
that debt is less than 3% of market capitalization, and the industrial supply
company’s dividend cushion is quite strong. (Full
disclosure: long 40 shares with a cost basis of $37.02/share)

Stock #10
HollyFrontier Corporation (HFC) – Current Share Price: $50.26

This dividend challenger only has $626M in cash against
$983M in debt. If it weren’t for that, HFC would be right next to Valero (VLO)
on the prime watch list as a no brainer in the petroleum refining space.

Stock #11 Applied
Industrial Technologies, Inc. (AIT) – Current Share Price: $41.38

Another case of less than ideal total cash position,
although this one is a little more extreme than the others. AIT’s $64M in cash
is quite a bit less than its $355M in debt. This wholesale industrial equipment
distributor has raised dividends an average of 11.6% per year for 6 consecutive
years. The leverage is something worth watching, but they generate plenty of
cash to cover the $1.08 dividend.

Stock #12 Crane Co.
(CR) – Current Share Price: $51.50

Okay technically Crane Co. missed on two metrics. The EPS 5
year CAGR was only 4.94% instead of 5%, and they only have $335M in cash
against $847M in debt. But come on… 4.94% is basically 5%. And if we use 2010
to TTM numbers the EPS 6 year CAGR is 7.3%. Something weird happened to the
adjusted earnings in 2011 because it was anomalously low. 2011 to TTM
technically represents a 150% 5 year CAGR. The point is the company is growing
just fine. The $1.32 dividend represents only a 2.56% market yield, but with 10
consecutive years of increases and average 8.2% DGR, it just might be worth
locking that in now so the invested yield can climb.

Stock #13 United
Technologies Corporation (UTX) – Current Share Price: $98.22

This one technically missed on two metrics as well, posting
only 4.84% for its Operating Cash 5 year CAGR. Also the dividend cushion ratio
is only .89 (assuming an 8% DGR). It’s not a horrible ratio though, considering
the company has $22.7B in total debt. No one is forcing them to pay off all
that debt in the next 5 years, so it’s not unreasonable to assume this
aerospace stalwart’s dividend will continue to grow as it has for the last 22
consecutive years.

Leave a Reply