Quadrix Digs Up Dividend Stocks
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 doesnâ€™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.
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.
Below, we take a closer look at four of our top dividend-paying stocks.
Aflacâ€™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. Â The primary source of the stockâ€™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 â€” 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 â€” an unduly conservative estimate, in our view â€” and 10% annually over the next five years.
While many of the conditions that plagued Aflac appear to have cleared up, the shares havenâ€™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 Mooreâ€™s Law.
Intelâ€™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 stockâ€™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, Oracleâ€™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 Microsoftâ€™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.