Quadrix Digs Up Dividend Stocks

1/9/2012


The Quadrix stock-rating system was not designed specifically for dividend-paying stocks, but it works quite well for them.

Among companies in the Dow Jones Broad Stock Market Index, the top quintile (one-fifth) of dividend-payers as measured by Overall score outperformed the average dividend-payer by an average of 3.2% in rolling 12-month periods since the start of 1992. Of course, top Overall scorers also delivered outperformance (2.6%) among nonpayers as well. This week we are focusing on stocks that pay dividends, and while the rating system has predictive power for stocks throughout the yield scale, it doesn’t behave the same in every sector.

Quadrix works better with high-yielding stocks in some sectors, and with low-yielders in others.

For our study, we used the Dow Jones Broad Stock Market Index, comprised of the largest 2,500 U.S. stocks. First, we divided each of the 19 sectors in half by dividend yield. Then we separated each half into quintiles based on dozens of Quadrix statistics to determine which metrics work better for dividend-paying stocks. In the table below we present average 12-month returns since 1992 for the top quintile (one-fifth) of the higher-yielders.

STATISTICS THAT WORK WITH DIVIDEND-PAYING STOCKS
We back-tested the returns of Dow Jones Broad Stock Market Index components since the start of 1992 to determine which Quadrix statistics work best for dividend-paying stocks. Below you will find the top four statistics, each of which worked in at least 15 sectors with average sector outperformance of at least 2.2%. We also listed two other statistics that work particularly well for each sector.
----- Outperformance of Top Quintile of Higher-Yielding Stocks -----
Four Top Quadrix Stats For Higher-Yielders
Quadrix
Overall
Rank
Quadrix
Value
Rank
Price/
Sales
Price/
Cash
Flow
Price/
Book
Price/Free
Cash Flow
Two Sector-Specific Stats
Automobiles & Parts
0.6
(1.6)
8.5
1.0
8.9
(2.3)
Next-Qtr. EPS Revision;
Dividend Yield
Banks
2.5
3.2
1.7
4.4
2.7
6.5
Est. Curr.-Qtr. EPS Chg.;
L-T Est. EPS Chg.
Basic Resources
4.2
7.9
3.4
6.8
(1.5)
6.5
P/E On Curr.-Yr. Est.;
Price/Oper. Cash
Chemicals
0.4
3.8
3.0
3.2
3.7
0.9
PEG Ratio; Dividend Yield
Construction & Materials
1.2
2.0
2.2
(0.4)
2.9
(1.6)
P/E On Next-Yr. Est.;
PEG Ratio
Financial Services
2.0
1.0
2.2
2.9
(0.8)
2.6
P/Operating CF;
Next-Qtr. EPS Revision
Food & Beverage
3.2
4.0
5.3
4.6
1.6
1.8
P/E On Next-Yr. Est.;
Price/Oper. Cash
Health Care
0.1
5.1
7.0
5.6
8.1
4.3
Est. Next-Yr. EPS Chg.;
Enterprise Ratio
Industrial Goods & Services
0.7
3.6
1.9
3.6
3.0
3.1
P/Es On Next-Yr.,
Curr.-Yr. Estimate
Insurance
4.4
5.1
5.9
5.8
2.3
4.9
P/Es On Next-Yr.,
Curr.-Yr. Estimate
Media
2.2
(0.4)
5.5
(2.0)
0.0
4.6
Curr.-Yr, Next-Yr.
P/E To 3-Yr. Median
Oil & Gas
0.6
4.7
3.1
3.6
4.7
1.9
Est. Curr.-Qtr. and
Next-Qtr. EPS Change
Personal & Household Goods
3.4
3.5
1.5
1.5
0.9
1.3
Gross Margin; P/E Ratio
Real Estate
(4.1)
1.0
14.1
3.9
12.1
10.8
P/B To 5-Yr. Median;
Dividend Yield
Retail
5.0
1.5
1.4
2.8
1.1
2.1
L-T Est. EPS Growth;
6-Mo. Total Return
Technology
1.4
(0.3)
(2.9)
3.2
0.3
4.8
Cash Flow/Interest Exp.;
Cap-X To Debt
Telecommunications
3.0
6.4
8.4
6.2
2.3
4.0
P/Es On Next-Yr.,
Curr.-Yr. Estimate
Travel & Leisure
1.4
1.1
0.2
2.9
0.9
3.2
Next-Qtr. EPS Revision;
1-Yr. EPS Growth
Utilities
0.0
0.9
2.6
1.0
2.0
(5.8)
Cap-X To Debt;
5-Yr. Med. Yield Growth
No. Of Sector Winners
18.0
16.0
18.0
17.0
17.0
16.0
Average For 19 Sectors (%)
1.7
2.8
3.9
3.2
2.9
2.2
Note: Real estate sector data only dates back to June 2008.

While the Overall rank is still the most important score, and we generally limit ourselves to stocks that earn Overall ranks of at least 80, the table below presents four statistics that work particularly well for dividend-paying stocks in the majority of sectors. For instance, in 18 of the 19 sectors, the top quintile of the higher-yielding stocks as measured by price/sales ratio outperformed the average stock in the sector, averaging excess returns of 3.9%. Value statistics dominate for this group, accounting for nine of the 10 best-performing metrics.

TOP DIVIDEND STOCKS
The 12 stocks below all yield at least 1%, pay out less than 50% of their profits in dividends, earn Quadrix Overall scores of 80. We also eliminated companies that score below 50 in either of the two key metrics for dividend-paying stocks in their sector, as shown in the table above. All 12 of the stocks earn A ratings, equating to above average. Stocks recommended for purchase are presented in bold.
Dividend Growth
Operating Cash
--- Flow Growth ---
Company (Price; Ticker)
Div.
($)
Yield
(%)
Div.
Payout
Ratio
(%)
12-
Mos.
(%)
5 Yrs.
(Annual.)
(%)
12-
Mos.
(%)
5 Yrs.
(Annual.)
(%)
Trailing
P/E
Ratio
Quadrix
Overall
Score
Aetna ($42; AET)
0.70
1.7
15
NM
76
74
7
9
99
Health Care
Aflac ($45; AFL)
1.32
2.9
21
10
19
45
18
7
92
Insurance
Caterpillar ($94; CAT)
1.84
2.0
26
5
11
65
11
14
95
Industrial
CF Industries
($154; CF)
1.60
1.0
9
300
54
238
100
8
100
Chemicals
CSX ($22; CSX)
0.48
2.2
30
38
33
31
16
14
86
Industrial
Dover ($59; DOV)
1.26
2.1
30
15
10
49
5
14
84
Industrial
Freeport-McMoRan
($40; FCX)
1.00
2.5
17
0
1
38
35
7
88
Basic Resources
Intel ($25; INTC)
0.84
3.4
34
16
14
37
14
10
95
Technology
Microsoft ($27; MSFT)
0.80
3.0
29
25
13
4
14
10
89
Technology
Rogers Commun.
($39; RCI) e
1.40
3.6
47
10
84
5
16
13
87
Telecom
Teck Resources
($38; TCK) e
0.81
2.1
18
36
NA
52
12
8
95
Basic Resources
Wyndham Worldwide
($37; WYN)
0.60
1.6
24
25
NA
49
45
15
90
Travel &
Leisure
NA Not Available.     NM Not Meaningful.     Note: Quadrix scores are percentile ranks, with 100 the best.    e Estimated.

Below, we take a closer look at four of our top dividend-paying stocks.

Aflac’s ($45; AFL) shares have traced a volatile path, posting a high just below $60 in March and a low of $31 in September before rallying to current levels.  The primary source of the stock’s misadventures has been its exposure to European bonds. But after pruning a lot of risk from the investment portfolio in recent quarters, management has the confidence to return more cash to shareholders.

Aflac hiked its quarterly dividend 10% in October — the 29th straight year of growth. The company plans to increase the dividend at least as fast as the rate of earnings growth. The consensus projects profit growth of 5% in 2012 — an unduly conservative estimate, in our view — and 10% annually over the next five years.

While many of the conditions that plagued Aflac appear to have cleared up, the shares haven’t yet fully recovered. The stock yields 2.9% and trades at seven times trailing earnings, 49% below its five-year average. Aflac also looks cheap relative to its peers, carrying an 8% discount to the industry median. Earning an Overall rank of 92 and scoring at least 95 for both sector-specific ranks, Aflac is a Buy and a Long-Term Buy.


Back in 1965, Intel ($25; INTC) co-founder Gordon Moore predicted that the number of transistors on a semiconductor would double every 24 months. In the following decades, the rapid pace of innovation traced his prophecy so closely that it became known as Moore’s Law.

Intel’s cash provided by operations has grown at almost that rate recently, nearly doubling over the last two years. In the nine months ended September, operating cash flow jumped 29% to $14.33 billion. The company has also posted impressive growth in two other areas. Intel shares trade at more than twice their early 2009 lows, while the quarterly dividend has doubled over the past five years.

In 2011, the stock advanced 15%, yet it trades at just 10 times trailing earnings, well below its three-year average of 14. Earning an Overall score of 95, Intel is a Focus List Buy and a Long-Term Buy.


Microsoft ($27; MSFT), issuing a pair of dividend hikes in excess of 20% in the last two years, is aggressively building its payout. Yet the company has plenty of flexibility for more growth in the years ahead. The software giant pays out less than 30% of its earnings in dividends, and net cash exceeds $5 per share, accounting for 20% of the stock’s price. Microsoft seems cheap at less than 10 times trailing earnings, a 34% discount to its five-year average and 22% below the median for systems-software stocks in the S&P 1500 Index. But subtract the net cash, and Microsoft trades at less than eight times trailing earnings.

Robust spending from business customers has helped Microsoft offset the frail health of consumers in recent quarters. However, Oracle’s ($26; ORCL) surprisingly soft November quarter awakened jitters about a slowdown in corporate spending. When Microsoft reports December-quarter results on Jan. 19, investors will focus on whether the weakness is confined to high-end database and server products or has spread to such products as Microsoft’s Office software. Wall Street expects roughly flat profits in fiscal 2012 ending June, a target that seems overly conservative. Yielding 3.0%, Microsoft is a Buy and a Long-Term Buy.


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