DGI Adventure – 01-09-2016 “Growing Champions” Quantitative Watch List

I have plenty of stocks to watch already so I’m not sure why
I created another watch list, but I did. I guess after Mr. Market went bananas
last week I started to wonder if this is going to get really ugly. If it gets
really ugly, I want a list of really high conviction ideas.  That’s not to say my previous watch lists
weren’t high conviction ideas. But maybe I could come up with some really
high conviction ideas?

In
November
my watch list put the entire CCC list through a set
of quantitative filters designed to single out companies with attractive yields,
who had solid growth over the last 5 years, and had relatively safe dividends. I
followed that post with a second list of honorable
mentions
, or stocks that nearly passed all the criteria.

Then in
December
I ran a similar set of filters on the contenders only. I expanded
the yield criteria a little bit and focused on dividend growth rather than revenue/earnings/cash
flow growth. That was a much smaller list. Of course it turned out I had
screwed up on one of the cells in the Google sheet. The overall list was the
same, but I was looking at
them wrong
.

As I said, I wanted this to be a really strong list. Also,
since it’s the New Year, I thought it might be nice to do something that could last
for all of 2016?

I felt like some of the earlier screeners were biased
towards stocks that had been facing strong headwinds recently. When you only
look at stocks that are yielding 2.5% or higher, there’s a selection bias for
stocks that have been having a tough go of it recently. That’s all fine and
good, but I wanted to explicitly ignore the current yield…at least initially
during the narrowing process. I didn’t cut any stocks based on the current dividend
yield. They could pay 0.3% for all I care. I just want to know that the
dividend can grow and that management has a strong history of growing it.

The filtering process went like this:

Step 1: Champions
only. All stocks have increased their annual dividends for 25 consecutive years
or more.

Step 2: Filter
for champions with a payout ratio (earnings per share) of 60% or less.

Step 3: Filter
for champions with a 1-year, 3-year, 5-year AND 10-year DGR of 8% or better.
There were a few familiar names on the bubble, so I left them on, but the bulk
of the stocks met this criteria.

Step 4: Evaluate
safety of the dividend. I manually look up and enter the Total Cash, Total
Debt, TTM Cash from Operations, TTM Cash Used for Investments, TTM Capex, and TTM
Cash Paid as Dividends.

This is the most tedious part of the process, but I’ve
already narrowed down the number of stocks at this point, and I think it’s
worth it. With this data, I can run formulae to calculate and examine (targets
in parentheses) the payout ratio in terms of free cash flow (also <60%), the
company’s debt/market cap (<33%), net cash position ($1B or more than the
total debt), and the dividend
cushion ratio
(>1.0).

Step 5: Compare
the current share price to historical. Basically this involves looking up and
inputting the 5-year average P/E ratio and the 5-year average yield and then
running a formula. Is the current value more or less than the historical?

Step 6: Publish. I’m
going to use this Google sheet for all watch lists I create this year. I’ll
just add tabs for each new list.

Click here to see the all new: Watch List Page back at the mother ship.

At the time of writing there were only 5 champions that met
every single criterion. My plan is after each earnings season, to go in and
update the cash metrics to see who improves or degrades throughout the year.

Now Presenting: The January
2016 “Growing Champions” – Elite 5

Stock #1 Computer
Services Inc (CSVI) – Current Share Price: $37.26

Never heard of ‘em. According to their website they are a full-service
financial technology provider. Sounds like they’re kind of the nuts and bolts of
financial software? The stock trades hands on an OTC exchange, so I guess that’s
something to beware of. 

Stock #2 Target
Corporation (TGT) – Current Share Price: $71.42

Data breach schmata breach. This one is very popular within
the dividend growth investing community, and it’s pretty clear why. Target has
great numbers all around. Kind of wish I had bought this instead
of Wal-Mart
. I think I was using previous year’s cash flow instead of TTM
when I did my analysis on Wallyworld. Maybe I should I try to switch?

Stock #3 Franklin
Resources Inc. (BEN) – Current Share Price: $33.65

Is a sea-change toward index investing going to
fundamentally change the paradigm investment management companies operate in? Dunno.
I do know that BEN vomits cash all over shareholders.

Stock #4 T. Rowe Price Group Inc. (TROW) –
Current Share Price $65.36

Second verse…same as the first! TROW has a slightly
weaker cash position than BEN, but only in terms of total quantity. Zero debt always gets my
attention.

Stock #5 Gorman-Rupp
Co. (GRC) – Current Share Price $23.61

If you haven’t ever used a Rupp pump, you might not be able
to fully appreciate this one. They make badass pumps. I had no idea they were
publicly traded much less a dividend champion. This is very intriguing for me.

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