DGI Adventure – 12-13-2015 “Growing Contenders” Quantitative Watch List

Since I published the
last watch list
, I decided to pull
the trigger on CMI
, and am already contemplating
if I need to buy more
to average down. I also put
in a limit order for VLO
which came awfully close to executing in Friday’s
trading session. Here’s hoping it triggers next week. My wife decided she
wanted to take on the
DSW investment
in her ROTH since she’d already spent her monthly budget on
real shoes…it’s kind of a proxy gratification thing I guess. That still leaves
us with about 3 undetermined purchases to finish out the year.

Next week is FOMC lift-off week…maybe. I mean it’s
probably definitely lift-off week. If you’re the kind of person who gets worked
up by headlines, you should be very excited and/or terrified about next week. I
have a feeling that all the anticipated volatility is a bit overhyped. On
the other hand
,

…the Fed decision
comes just two days ahead of “quadruple-witching,” when options on
stocks and indexes and futures on indexes and single-stocks all expire, making
the index particularly prone to a jump in volatility.

JPMorgan
derivatives analysts estimate that nearly $1.1 trillion of S&P 500 options
are set to expire on Friday morning, about 60 percent in put options, typically
used as portfolio hedges.

 I don’t know about you, but “quadruple-witching” sounds promising. 

It reminds me of college when someone who was known for
having “epic parties” was planning an “epic party”. Sometimes it was just
another house party and turned out disappointingly tame. But other times someone
turned a bouncy castle into a “ketamine boxing” ring and the hot-tub managed to
catch on fire.

It could get whacky. Probably won’t…but it could, and if it
does, I want to have some more limit orders waiting in the wings, or at least
have some good gaff fishing prospects to watch closely. 

Now Presenting: The “Growing
Contenders” Quantitative Watch List

For this watch list, I started with a slightly smaller
universe of stocks: Just the dividend contenders.  I expanded the yield criteria to look at anything
over 2% rather than 2.5%. Then I wanted to focus on stocks that have a recent
history of dividend growth. I copied and pasted David Fish’s spreadsheet data
into a google sheet, sorted and filtered, then did a little of my own data
mining to measure the other criteria. I published
the sheet
to the web if you’re interested in seeing it.

Here are the 12 criteria.

1)     
2.0% yield or better – (the google sheet
automatically updates the yield based on the current market price…so
technically some stocks might have missed the cut when I first filtered but now
they could be yielding 2%. Oh well. Digging up the cash flow data is a pain in
the ass. I’m only doing it once.)

2)     
1 year DGR greater than 10%

3)     
3 year DGR greater than 10%

4)     
5 year DGR greater than 10%

5)     
10 year DGR greater than 10%

6)     
0.5% DGR margin of safety – meaning the historic
15 year mean DGR (8% max) is at least 0.5% higher than the reverse DDM DGR
implied by the current share price.

7)     
Payout ratio in terms of earnings is less than
60%

8)     
Current P/E ratio is less than 5 year average
P/E ratio

9)     
Current yield is greater than 5 year average
yield

10)  
Debt/Market Cap is 33% or less

11)  
Either total cash of $1B or total cash is greater
than total long term debt.

12)  
Dividend
cushion ratio
is 1.0 or greater.

Why just contenders? Well…why not?

Actually the main reason is that I was getting a little
tired of the DGI cult focus on past performance i.e. years of dividend
increases. Some of the champions (like
CVX for example
) are in a tough position in large part because of their
dividend growth streaks. Contenders have an established history that’s good
enough for me to believe management is committed to a dividend growth culture,
but still have some runway potentially before they become dividend elephants
that don’t have the flexibility to adapt to challenging market conditions.

Out of 253 contenders, 13 made this watch list. Only one of
them passed all 12 criteria. Six passed all but one of the criteria. The other
6 passed all but 2 or 3 of the criteria. Let’s have ourselves a look-see at
what we turned up.

Stock #1 QUALCOMM (QCOM)
– Current Share Price: $47.46

This is the only stock to meet all of this month’s criteria.
QCOM made last month’s honorable
mention list
, having just missed the 5 year operating cash CAGR target of 5%. The
price has come down an additional ~4% since that watch list was published. Boy
is this is an interesting stock… The headwinds the company faces seem to me to
affect the fundamental core of their business. But they have $17B in cash! And still
collect a shit-load of royalties on 3G and 4G related patents. It’s kind of a
gamble. But gambling can be fun!

Stock #2 Cummins Inc
(CMI) – Current Share Price: $87.60

I think I screwed up the dividend cushion ratio calculation last
month, because that’s the one metric Cummins missed on this time around, and I
can’t imagine it changed that much. It’s still fairly close to 1.0 though, and
they still have more cash than debt…for now. Feels like I’m trying to catch a
falling knife here, but it’s starting to push the long term support level of
$86 where I said I’d be interested in backing the diesel truck up.

Stock #3 Nu Skin
Enterprises Inc. (NUS) – Current Share Price: $35.30

Technically this only missed one metric with a dividend cushion
ratio of 0.34. There was an unspoken 13th criterion: Company is not
a pyramid scheme. NUS missed on that one, and it’s kind of a big deal for me.
Don’t invest in pyramid schemes.

Stock #4 International Business Machines
Corporation (IBM) – Current Share Price $134.57

Big Blue just missed a perfect score with a dividend cushion
ratio of 0.72. This would primarily be due to the $40B in debt, which is still
only 30% of market cap (a severely reduced market cap at that since the stock
is off ~30% from its highs in 2014), and which is not all due in the next 5
years…the grain of salt one must always take with a dividend cushion ratio. IBM
is reinventing itself, not for the first time. Mr. Market is skeptical. There’s
a big discount here if he’s wrong.

Stock #5 Gap Inc.
(GPS) – Current Share Price $26.06

When I first bought
GPS
back in September, my investment
thesis process
was still developing so my analysis
of The GAP
, didn’t include the dividend cushion ratio, which is the one
filter it didn’t pass this time around. In this case, the debt isn’t too high. The
CapEx is probably to blame here. They’re spending a lot of money right now
trying to make the Old Navy model work for Banana Republic and the flagship GAP
lines. From 2006 – 2014, GPS average CapEx was ~$561M/year. It was $714M in
2015.

Stock #6 MSC Direct
Industrial Company, Inc. (MSM) – Current Share Price $58.66

MSM would be like my Fastenal
investment
2.0. Not sure why it didn’t make last month’s watch list. The
only fault I found this time around was the total cash position. Pretty sure it
missed because last year the company paid a $3.00/share special dividend. Their
normal quarterly dividend costs them ~$25M in cash. That quarter they paid out
$208M. That was very nice of them. It might be nice if they had that cash now,
but with a dividend cushion ratio over 2 (even if the special dividend became
permanent), I doubt they’ll miss it.

Stock #7 Monsanto
Company (MON) – Current Share Price $93.63

The only reason MON didn’t pass all criteria is I have a max
assumed DGR of 8%, and the current market price implies a reverse DGR of 7.7%.
It would be easy enough to put in a limit order for $86.50 and just wait. It
went down to the $83 range as recently as September. With a lower total yield,
MON may not be a pure dividend growth play either. For a not pure DGI play they
sure do grow the shit out of their dividend though don’t they?

Stock #8 -13 – Feel
free to check the Google sheet to see what 2-3 criteria each stock missed on.
Commentary of (almost) one sentence or less:

Lockheed Martin Corporation (LMT) – Current Share Price:
$217.20 – Lots of conflict in the Middle East is probably damn good for
business.

Texas Instruments Inc. (TXN) – Current Share Price: $56.21 –
They make more than just calculators, trust me.

Xilinx Inc. (XLNX) – Current Share Price: $47.35 – The
integrated circuit doo-hickey manufacturer you’ve probably never heard of (I
know I haven’t.)

ACE Limited (ACE) – Current Share Price: $113.08 – This Swiss
insurance company expects to complete its purchase next year of the hilariously
named dividend champion, Chubb Corp. According to Morningstar this will create
the first internationally “moaty” insurance company. Okay then.

Raytheon Company (RTN) – Current Share Price: $126.20 – Like
Lockheed, but with a lower yield, way better dividend cushion ratio and the
advantage of not having just bought a stupid helicopter company?

Polaris Industries Inc. (PII) – Current Share Price: $93.41 –
I never would have thought to invest in ATVs and snowmobiles, but that is the
beauty of creating watch lists like this…right?

Disclaimer: Hopefully it’s incredibly obvious, but nothing I
ever publish should ever be considered advice of any kind, including this
article. I am not a licensed investment adviser, or financial planner or
anything. I am a whackadoodle on the internet with an opinion. The only license
I have is a driver’s license, and I wonder sometimes how I swung that. You need
to do your own due diligence and/or consult someone who’s licensed to give
actual advice before making an investment decision. You certainly shouldn’t
blindly act on some whackadoodle on the internet’s opinion. But you knew that
already, didn’t you?

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