Higher Yields, Lower Quadrix Scores

5/14/2012


Sometimes yield chasers come out on top. But they shouldn't count on doing it all the time.

Over the last dozen rolling 12-month periods, dividend stocks have set the pace. During those periods, dividend payers in the S&P 500 Index averaged 13.5% returns, versus 9.7% for nonpayers. In contrast, since 1994, dividend-paying stocks in the S&P 500 Index have averaged lower 12-month returns than nonpayers.

Just as dividend payers outperformed nonpayers over the last dozen periods, high-yielders outperformed the average dividend payer. We divided S&P 500 dividend payers into quintiles (fifths) based on yield, and the higher-yielding quintiles delivered the strongest returns in the last dozen periods. Since 1994, higher-yielding stocks have also outperformed lower-yielders, but by a much smaller margin.

Outside the S&P 500 the story is different. In fact, smaller stocks have taken the opposite path. Smaller high-yielders have lagged the average dividend payer over the last dozen periods, yet outperformed since 1994. Historically, chasing yield has made more sense with smaller stocks. However, the Forecasts does most of its fishing in the big-stock pond, and we focused our research on dividend payers in the S&P 500.

High-yielders don't impress

Head to head, high-yield stocks come up short relative to other stocks in the S&P 500.

Not good values: On an absolute basis, high-yielders average higher Quadrix Value scores and lower price/earnings, price/sales, and price/cash flow ratios than nonpayers. But dig a little deeper, and the picture is not as sanguine. Since 1994, the top one-fifth of dividend payers as measured by yield averaged a P/E ratio 21% below that of the average S&P 500 stock. As of May 8, that discount had disappeared. On average, high-yield stocks trade in line with their five-year average P/E ratios, versus discounts of 5% for the average dividend payer in the index and 16% for the average nonpayer.

Poor Quadrix scores: As a group, high-yield large stocks don't look attractive by the numbers. The top quintile of S&P 500 dividend payers by yield averages an Overall score of 45, versus 60 for all dividend payers. High-yielders also earn lower Momentum, Quality, Earnings Estimates, and Performance scores than other dividend payers.

LONG ON YIELD, SHORT ON FUNDAMENTALS
Below we present averages for S&P 500 Index stocks. While dividend-paying stocks have averaged higher total returns over the last year than nonpayers, they earn slightly lower Quadrix Overall scores and have less operating momentum. We divided the dividend payers into fifths (quintiles) based on yield, and the highest-yielding stocks average the weakest Overall, Momentum, Quality, and Performance scores.
---------------- Quadrix Scores ----------------
-- P/E Ratio --
Yield
(%)
Momen-
tum
Value
Quality
Perfor-
mance
Overall
Trailing
Vs. 5-
Yr.
Avg.
12-Mo.
Total
Return
(%)
All Stocks
1.9
51
56
63
54
60
17
0.93
0
All Div.
-Payers
2.4
50
57
61
54
60
16
0.95
1
All Nonpayers
0.0
54
53
68
51
61
18
0.84
(6)
High-Yield
Quintile
4.7
39
54
51
50
45
16
1.00
3
Quintile 2
3.0
44
61
60
51
58
15
0.88
(2)
Quintile 3
2.2
52
61
64
56
66
15
0.93
0
Quintile 4
1.5
55
55
64
57
63
17
1.00
3
Low-Yield
Quintile
0.7
62
55
68
57
67
19
0.94
3
Notes: Quadrix scores are percentile ranks, with 100 the best.   Averages excluding P/E ratios below 0 or over 75 and growth rates above 100%. 

Weak operating momentum: While dividend payers in the S&P 500 Index averaged 9% per-share-profit growth over the last 12 months, the top one-fifth based on yield averaged 3% growth, with the next-highest-yielders managing just 1%. In contrast, stocks that do not pay dividends averaged 14% growth.

Does this mean you should avoid stocks with solid yields? Not at all. But be choosy. Quadrix can help you here, as discussed in the story above. The table below lists 11 stocks with solid yields (at least 2.5%, enough to qualify for one of the top two quintiles in the S&P 500) and attractive Quadrix scores.

Abbott Laboratories' ($63; ABT) dividend has risen in 40 straight years and currently yields 3.3%. The drug and medical-equipment maker has delivered annualized dividend growth of 12% in the past three years and 9% over the past decade. Dividend growth closely tracks revenue and per-share earnings (both up an annualized 9% in the past 10 years).

Abbott plans to split itself into two separate companies by the end of the year. The split will create AbbVie, a branded drug business with annual revenue of roughly $18 billion and operations concentrated in developed markets. The second business will retain Abbott's name and should produce annual sales of about $22 billion, with higher growth due to its exposure to emerging markets. The new Abbott will sell medical devices (27% of total revenue), generic drugs (25%), diagnostics (20%), and nutritionals (28%). Abbott is a Long-Term Buy.


J.P. Morgan Chase ($41; JPM) raised its quarterly dividend 20% to $0.30 per share in March. Expect the bank to keep steadily rebuilding its dividend — the quarterly payout was slashed from $0.38 to a $0.05 in early 2009 — though CEO Jamie Dimon has ruled out a special dividend, at least in the near term.

J.P. Morgan sports the highest yield — 2.9% — of any of the giant U.S. banks that will be forever linked to the financial meltdown. Earning a Value score of 90, J.P. Morgan trades at nine times trailing earnings, a 40% discount to its five-year average P/E ratio.

An Overall score of 92, up from 64 at the start of the year, reflects improving operating momentum, rising earnings estimates, and strong price performance. J.P. Morgan also earns at least 93 in both of our sector-specific scores. The diversified financial giant, already a Long-Term Buy, is being added to the Buy List.

 

Even after rallying 30% since September and reaching a four-year high in April, KLA-Tencor ($50; KLAC) shares yield 2.8%, well above their five-year average of 2.1%. The higher yield reflects $0.40-per-share annual dividend hikes in each of the past two years, both announced in July, to push the annual payout to $1.40. A conservative payout ratio of 30% and solid operating momentum leave room for more dividend growth.

Cash provided by operations has soared 55% in the past year, including 7% growth in the March quarter. KLA makes inspection and testing equipment for the semiconductor industry, a space where spending continues to rise. KLA's three largest customers all forecast record capital expenditures for a second consecutive year. KLA-Tencor is a Buy.

HIGH-YIELD STOCKS
Below we present 11 A-rated stocks yielding at least 2.5%, which would qualify them for one of the two top quintiles (fifths) of the S&P 500 Index based on yield. Our back-tests suggest that the Quadrix Value and Performance scores work fairly well for higher-yielding stocks, and we required every stock in the table to earn at least 50 in those scores, as well as 80 or more Overall. Stocks recommended for purchase are listed in bold.
Dividend Growth
(Annualized)
--- P/E Ratio ---
12-Month
--- Growth ---
------- Quadrix Scores * -------
Company (Price; Ticker)
Div.
($)
Yield
(%)
3
Years
(%)
10
Years
(%)
Trailing
Vs. 5-
Yr. Avg.
12-Mo.
Total
Return
(%)
Sales
(%)
EPS
(%)
Value
Perfor-
mance
Overall
Abbott Laboratories
($63; ABT)
2.04
3.3
12
9
13
0.87
23
8
11
57
81
80
BlackRock ($182; BLK)
6.00
3.3
24
NM
15
0.64
(4)
2
17
72
59
96
CA Technologies
($26; CA)
1.00
3.8
84
NM
12
0.64
11
9
24
76
71
94
Exxon Mobil
($84; XOM)
2.28
2.7
13
10
10
0.87
3
22
18
86
53
93
Intel ($27; INTC)
0.90
3.3
17
27
11
0.69
24
17
7
73
81
96
J.P. Morgan Chase
($41; JPM)
1.20
2.9
(8)
(1)
9
0.60
(5)
(2)
(4)
90
80
92
KLA-Tencor
($50; KLAC)
1.40
2.8
33
NM
11
0.62
14
12
13
77
65
94
Microsoft ($31; MSFT)
0.80
2.6
15
NM
11
0.81
21
6
9
71
74
97
Plains All American
($79; PAA)
4.18
5.3
5
7
15
0.81
35
30
104
67
74
94
U.S. Bancorp
($32; USB)
0.78
2.5
(23)
0
12
0.79
28
4
31
67
84
92
Wells Fargo
($33; WFC)
0.88
2.7
(14)
5
11
0.71
20
(4)
15
84
85
93
NM Not Meaningful because company didn't pay a dividend 10 years ago.     * Percentile ranks, with 100 the best.

Looking for yield? Try Quadrix

The Forecasts does not select stocks based on yield, instead focusing on total-return potential. Our Quadrix stock-rating system was designed to identify stocks without regard for yield. However, investors who prefer high-yielding stocks
can still use Quadrix to cull the herd.

As the chart below illustrates, Quadrix doesn't work as well for dividend payers within the S&P 500 Index as it does for the index as a whole. But it does work. The top quintile (fifth) of S&P 500 dividend payers based on Overall score has outperformed the average stock in the index by an average of 1.5% in rolling 12-month periods since 1994. The most effective Quadrix category scores are Value (2.5% outperformance for top quintile) and Earnings Estimates (1.0%). Earnings-estimate data only goes back to 2004.

What happens when we narrow our focus? Let's divide the index's dividend payers into quintiles based on yield. Within the two top-yielding quintiles, the highest Overall scorers outperformed the average stock in the high-yield groups by an average of at least 1%.

QUADRIX LESS EFFECTIVE WITH DIVIDEND STOCKS
Within the S&P 500 Index, the Quadrix stock-rating system works for dividend payers, though not as well as it works for nonpayers. For example, the top quintile (fifth) of dividend payers as measured by Overall score outperformed the average dividend-paying stock by an average of 1.5% in rolling 12-month periods since 1994, versus 2.6% outperformance for stocks in the broader index and 6.8% for the average nonpayer. The effectiveness of the Overall score declines as yields rise.
Outperformance Of Top Quintile Of
------------------ S&P 500 Dividend-Payers As Measured By ------------------
Overall
(%)
Momen-
tum
(%)
Value
(%)
Quality
(%)
Fin'l
Str.
(%)
Earns.
Ests.
(%)
Perfor-
mance
(%)
All S&P 500
Index Stocks
2.6
1.1
2.9
0.5
0.6
0.2
0.9
Dividend-Payers
1.5
0.5
2.5
0.4
0.0
1.0
0.5
Top Quintile
By Yield
1.0
(0.7)
1.6
0.9
0.0
0.9
(0.4)
Second Quintile
By Yield
1.1
0.4
2.0
0.5
(1.2)
1.8
1.2
Non Dividend-
Payers
6.8
4.1
4.0
3.6
5.1
(3.5)
2.4

 

 


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