Quadrix's Yield Should Improve

6/12/2017


We've got bad news and good news.

First the bad news: Our Quadrix stock-rating system hasn't helped income investors much in recent months. In the last dozen rolling 12-month periods, top Overall scorers among dividend-paying stocks in the S&P 1500 Index lagged the typical income stock in the index by nearly 4%.

Now the good news: These things run in cycles, and by the looks of it, we've seen the worst of the weakness.

Since 1994, dividend-paying stocks with the highest Overall scores have outperformed by an average of more than 2%, as we discuss here. In more than two-thirds of the periods since 1994, high Overall scorers have delivered above-average returns. While decades of research by us and many others demonstrate that a 68% winning percentage is very high, it still allows for periods of weakness, like the one we've seen over the last year.

In the last 12 rolling periods, only the Financial Strength and Value category scores worked with dividend-payers; nothing worked for nonpayers. However, when we slice the index up by yield, the picture isn't as clear-cut. While we can't really claim recent success for Quadrix with any piece of the income-stock market, the worst performance comes at the extremes. The highest- and lowest-yielding stocks saw the weakest relative returns, while those with yields in the middle performed quite a bit better. The Value score in particular has worked poorly for high-yield stocks recently.

Since 1994, our system has typically worked less well with the highest-yielding stocks, so at least some of the recent trend matches up with history.

Our sweet spot is the middle range of yields, and most of our recommended stocks fit this criteria. Historically, Quadrix has worked best with stocks in the third and fourth quintiles (middle and second-lowest), which today sport average yields of 1.2% to 2.6%. The stock-rating system has shown predictive power with all types of income stocks, so you should be comfortable purchasing high Quadrix scorers regardless of their yields.

Based on average yield spreads since 1994, the middle quintile on yield topped out at 2.3%, while the second-lowest quintile included stocks with yields above 0.9%. It takes a somewhat higher yield to qualify for the three middle yield quintiles today relative to historical norms, though the cutoff for the top quintile, 3.5%, is in line with the long-run average.

As always, Quadrix is an important first step in the analysis process, but not the only step. High Quadrix scores alone are not sufficient reason to purchase a stock. All of the dividend-payers in the table below earn Overall scores of at least 75 but also provide other reasons for optimism. We dig into four of those companies below:

In each of the last three quarters, Citizens Financial Group ($35; CFG) grew sales at least 11% and per-share profits at least 31%, both well above the regional bank's historical growth rate. While Citizens Financial has boosted its growth in part by acquiring loan portfolios, solid organic loan growth and rising net interest margins also boosted operating momentum. Credit quality remains strong, with last year's net charge-off rate for loans at just 0.32%, below that of most peers.

Citizens Financial has raised its quarterly dividend twice in the last 14 months and now pays out $0.14 per share quarterly, equating to a yield of 1.6%. The stock earns an Overall score of 96, with five category scores (Momentum, Value, Quality, Financial Strength, and Earnings Estimates) above 70. Citizens Financial is a Focus List Buy and a Long-Term Buy.


Shares of media giant Comcast ($42; CMCSa) have jumped 8% since the company reported per-share-profit growth of 26% and revenue growth of 9% for the March quarter. Results exceeded analyst expectations, helped by the movie unit, which more than doubled revenue in the quarter. While investors can't count on the string of blockbuster films continuing, Comcast's other units are also growing. The company has managed to increase its number of video subscribers in five of the last six quarters, a trend flying in the face of fears about cord-cutting.

Comcast expects much of its future growth to spring from the theme-park unit. It plans to pay more than $2 billion for the 49% of Universal Studios Japan it doesn't already own; the new Volcano Bay water park will open at Universal Orlando this summer; and work has begun on a $7 billion Chinese theme park slated to open in 2020. In recent years, the company has had increased success leveraging its movie franchises via theme parks; we expect Comcast to keep fishing in that pool. The stock, yielding 1.5%, is a Focus List Buy and a Long-Term Buy.


Lowe's ($78; LOW) has delivered impressive dividend growth. The payout rose at an annualized rate of 25% over the last three years and 21% over the last decade. Earlier this month, Lowe's raised its quarterly dividend 17% to $0.41 per share, continuing a streak of annual increases dating back to at least 1980. With the indicated year-ahead dividend equating to less than 40% of trailing 12-month profits, Lowe's retains the flexibility to both invest in its business and keep up the dividend growth.

While the building-supply retailer reported sales and per-share profits below consensus targets for the April quarter, growth was still 11% and 17%, respectively. The consensus projects revenue growth of 5% and per-share-profit growth of 16% for fiscal 2018 ending January, targets that have remained steady. At 19 times trailing 12-month profits, Focus List Buy-rated Lowe's trades at a 17% discount to its three-year average.


Owens Corning ($65; OC), a maker of building supplies, initiated its dividend in 2014. After boosting the payout every year since then, the stock yields 1.2%. The company earns a Quadrix Overall score of 90, powered by scores of 85 or higher in Value and Quality; both sector-specific scores top 90.

Customer purchases ahead of a price hike fattened the bottom line in the March quarter, probably eating into June-quarter results. The March price increases, designed to offset rises in raw-material prices, are just the first step; Lowe's plans more hikes later this year. If those price increases stick, analyst expectations for nearly 11% profit growth this year could prove conservative. Owens Corning is a Focus List Buy and a Long-Term Buy.

INTERESTING INCOME SELECTIONS
Below we present intriguing investment options of various yields, three from each of the five yield quintiles of S&P 1500 Index dividend-payers. All 15 stocks earn A ratings; those in bold are on our recommended lists. Yield ranges for quintiles reflect averages since 1994, not current yield ranges.
Annualized
-- Div. Growth --
------------------------------ Quadrix Scores ------------------------------
Company (Price; Ticker)
Div.
(%)
Yield
(%)
3
Years
(%)
10
Years
(%)
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Overall
Sector
Top quintile (above 3.5% yield)
AbbVie ($69; ABBV)
2.56
3.7
17
NA
65
77
89
66
83
60
94
Health care
EQT Midstream
Part.
($71; EQM)
3.56
5.0
25
NA
46
85
96
97
40
35
89
Energy
General Motors
($34; GM)
1.52
4.4
8
4
78
98
78
50
42
32
93
Cons.
discretion.
Second quintile (2.3% to 3.5%)
Amgen ($162; AMGN)
4.60
2.8
24
NA
63
86
95
81
36
34
91
Health care
Carnival ($64; CCL)
1.60
2.5
17
4
88
74
84
87
85
87
98
Cons.
discretion.
J.P. Morgan Chase
($84; JPM)
2.00
2.4
10
4
71
82
65
90
33
36
83
Financials
Third quintile (1.6% to 2.3%)
Citizens Financial
($35; CFG)
0.56
1.6
NA
NA
92
86
74
98
74
45
96
Financials
Lowe's ($78; LOW)
1.40
1.8
25
21
70
73
93
47
44
45
87
Cons.
discretion.
Royal Caribbean
($112; RCL)
1.92
1.7
24
12
90
69
93
61
78
90
97
Cons.
discretion.
Fourth quintile (0.9% to 1.6%)
Comcast
($42; CMCSa)
0.63
1.5
17
NA
82
58
83
67
88
78
91
Cons.
discretion.
Lear ($153; LEA)
2.00
1.3
36
NA
79
94
95
51
88
67
99
Cons.
discretion.
Owens Corning
($65; OC)
0.80
1.2
8
NA
46
87
85
65
49
68
90
Industrials
Fifth quintile (below 0.9% yield)
FedEx ($206; FDX)
1.60
0.8
39
16
57
65
75
50
63
49
75
Industrials
Southwest Airlines
($60; LUV)
0.50
0.8
16
30
56
76
98
69
73
80
94
Industrials
Zions Bancorp
($40; ZION)
0.32
0.8
26
(15)
92
78
67
94
59
39
91
Financials
Notes: Quadrix scores are percentile ranks, with 100 the best.Ā  NA Not available because of a lack of dividend history.

Five key facts

----- Avg. 12-Mo. Outperformance Of Top Quadrix Scorers Since 1994 -----
Group Within S&P 1500
Overall
(%)
Momen-
tum
(%)
Value
(%)
Quality
(%)
Fin'l
Str.
(%)
Earns.
Ests.
(%)
Perfor-
mance
(%)
Dividend payers
2.1
0.9
2.7
0.5
(0.5)
0.7
(0.1)
Non-dividend payers
1.1
(0.7)
1.3
(0.1)
(0.8)
(0.7)
(0.5)
Quintiles of dividend-payers (historical average yield range)
Top (above 3.5% yield)
1.0
0.4
1.0
0.4
(1.2)
1.3
(0.8)
2nd (2.3% to 3.5%)
2.1
0.4
2.7
1.4
0.1
0.6
(0.4)
3rd (1.6% to 2.3%)
2.7
1.6
3.6
1.5
0.6
1.0
(0.5)
4th (0.9% to 1.6%)
3.4
1.8
2.8
1.5
(0.7)
1.8
0.8
Bottom (below 0.9% yld.)
2.1
1.3
2.6
0.4
0.1
(0.3)
1.5

Over the long haul, Quadrix has proved effective at finding dividend-paying stocks with the potential to outperform the market.

Here are five things every subscriber should know about using Quadrix with income stocks:

1) Historically, Quadrix has worked better with dividend-paying stocks in the S&P 1500 Index than it has with nonpayers. In rolling 12-month periods since 1994, the top quintile (one-fifth) of Overall scorers among dividend-payers outperformed the average dividend-paying stock by an average of 2.1%, versus 1.1% outperformance for the top-scoring nonpayers.

2) Within the basket of dividend-paying stocks, Quadrix does worst among the highest yielders. Within the quintile of S&P 1500 dividend-payers with the highest yield, top Overall scorers outperformed by an average of just 1.0% during 12-month periods; in the other four quintiles of lower-yielding stocks, top Overall scorers averaged at least 2.1% outperformance. Today, a yield above 3.5% puts a stock in the top quintile — matching the average minimum yield for the top quintile since 1994.

3) Value has been the most effective category score among dividend-paying stocks — a phenomenon that also holds true for nonpayers, as well as most other groups we've analyzed. However, high Value scorers deliver better average outperformance (2.7%) among dividend-payers than they do among nonpayers (1.3%).

4) The Momentum, Quality, and Earnings Estimates category scores have shown predictive power among income stocks since 1994, while they have not worked with nonpayers.

5) This last fact is more important than the others. While Quadrix has worked quite well for income stocks over the long haul, it has had periods of ineffectiveness — including the recent past. However, the underperformance has lessened in recent months. History suggests that Quadrix should regain its efficacy.


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