It doesn’t take a stock market guru to observe the quickest way to shareholder hearts is a hefty dividend hike. On August 15th when Cisco hiked its dividend by 75% to 14 cents it’s stock rallied nine percent that day. That’s the kind of pin action we are looking for. With that in mind I spent some time searching through popular financial sites for a ready built dividend screen that might foretell companies that would dramatically raise their dividends. I didn’t find exactly what I was looking for so I had to design one myself.
There are a lot of dividend screens out there. In fact there are numerous ETFs that are basically the results of dividend screens. Standard and Poor’s even has an entire index modeled to companies that have a long history of raising their dividends every year, known as the Dividend Aristocrats. There is an accompanying ETF of course designed to mimic this, the SDY. So finding companies that have good dividends or a corporate culture and business history of raising them is not hard to do. The trick though is finding companies that will raise them dramatically like Cisco did.
Some of the dividend screens out there require multiple years of both price and dividend records. That’s far too onerous for me, considering some of the giant tech companies with pristine balance sheets like Apple just started paying dividends. In fact I’d leave out that requirement completely as well as one like the Dividend Aristocrats that demands many consecutive years of dividend increases. Granted a corporate culture of paying and raising dividends is a critical component but I’m more interested in not missing out on the future Apples than I am of picking up the remaining Pitney Bowes. It’s the ability to pay the dividend and increase it in the future not the past that’s important. Corporate culture will only carry you so far. There has to be the means behind the will.
So my first criteria is that a company must at least pay a dividend of .8% or more. That’s measly low for most dividend investors but my theory is that corporate CEOs will be under increasing pressure to give money back to shareholders in the form of dividends and not buy backs or takeovers. Companies that have dividends are going to be raising them if they can so a sub 1% dividend today could quickly become a plus 2% dividend tomorrow. People are clamoring for yield and what the people want they usually get.
Payout Ratio is the next big criteria. The payout ratio is divided by taking the dividend per share by earnings per share. It’s the percentage of earnings that are paid out as dividends. Many popular consumer staples companies like Coca Cola, Kellogg, Kraft, and Procter Gamble have payout ratios that hover around 50%. Too high a ratio leaves little room for increased dividend payouts in the future. Note that when Cisco recently hiked its dividend by 75% to 14 cents very few analysts noted the fact that CSCO with its new dramatically increased dividend would now have a payout ratio just 37.6% based on 2012 trailing 12 month earnings, still far below many A rated blue chip dividend paying stocks. Cisco went from paying no dividends to a 10% ratio to a 37% ratio because it could. I want to find the companies with the wherewithal to raise the ante. My next criteria is the payout ratio must be 30% or less leaving the company the room to raise it’s dividend.
Financial strength is very important. Companies don’t raise dividends if lenders are breathing down their backs. There are many measures of financial strength and popular screening sites have various ratios like debt to equity or quick ratios determining companies abilities to pay current obligations. I wanted something far more stringent than debt to equity. I have a problem with that criteria because it puts a value on intangible assets such as goodwill that are not easily determined. When a company like Microsoft buys a company like aQuantive for $6.3 billion cash it’s just a giant whooshing noise from the current asset side of the ledger to the equity side and who knows really what it’s worth. In the case of aQuantive apparently not much as Microsoft wrote off almost the entire purchase, $6.2 billion just over five years later. No, I’m a bread and butter kind of investor. Show me the cash and ready assets that can easily be converted to cash. So in this case I’m looking for current assets over total liabilities. The Current Assets to Total Debt ratio measures the company’s ability to cover its total debt with its Total Current Assets. This ratio is also used to estimate the liquidity of the company by showing the company can pay its creditors with its current assets if the company’s assets ever had to be liquidated. An increasing Current Assets to Total Debt ratio is generally a positive sign, showing the company has a better ability to satisfy its debt obligations using its Total Current Assets. A ratio of 1.0 or greater indicates the company would just meet its debt obligations, when in reality the company would need a ratio result that is higher than this, as some of the current assets could not easily be converted into cash.
This is really hard to screen for. I tried Fidelity, Merrill Lynch, Google Finance, Yahoo,Smart Money, MSN- nowhere can I find this important screening criteria. I’m working on a close substitute. Right now I might have to be be content with Smart Money current assets is greater than liabilities criteria.
Earnings is key and earnings growth is critical. This important criteria is often overlooked by yield hounds. It’s true that the dividend component provided 44% of the total return of the S&P 500 over the last 80 years but you will soon run out of money to pay dividends if you aren’t making it. You certainly won’t be raising your dividend very often without earnings growth. I’d like to see a company profitable for at least the last 3 years. This is where you will run into limits with your screening tool. I chose 5 yr.net operating margins are greater than 0. The next criteria was earnings growth rate greater or equal to 2%.
The final criteria I used was market capitalization. I wanted to rule out smaller caps. This was easy to do. Small cap companies historically pay much in dividends anyway. Add to the final criteria market capitalization greater than $500 million.mpanies don’t usually pay much in the way of dividends to start with. I’ve attached the screenshots from various screening tools I have access to. It’s important to remember that buying stocks as the result of a screen is very shoddy work. It’s just the first step and is designed to narrow down the universe of stocks for you to do your own analysis including checking the output values from the screen. As the saying goes, garbage in- garbage out.
I used a variety of easily acquired screening tools. The values that you can screen on differ from one screener to the next. I’ve attached the results of one of these screens.
Smart Money– only 104 stocks passed this criteria. I’ve attached this list as an excel spreadsheet here. I’ll be adding more screens to the study in the coming days.