Piotroski Analysis with a Dividend Theme

[800peace]

There's a genius accounting Prof. named Piotroski, and he created a brilliant financial statement analysis. Piotroski started with the observation made by Ben Grahm that stocks priced low on a price-to-book basis tended to outperform the market. Admittedly, many companies cheap on a price-to-book basis, are really a red flag that failure is on the horizon. Piotroski found a way to separate winners from losers using historical financial statements.

Piotroski's investment strategy applies a nine criteria binary scoring system to the cheapest 20% of the market on a price/book basis. A score of 7, 8, or 9 suggest taking a long position. A score of 1, 2, or 3 suggest taking a short position.

In Piotroski's article he suggest further research be done with different valuation metrics other than price-to-book. I've decided to replace the price-to-book criteria with "Current Dividend Yield > Yield to Maturity of the 10-yr T-Note." Accepting scores >6, I accomplish alpha and a 23% CAGR of dividends since 01/1999.

[mikejody]

Would you mind explaining the actual process of reaching scores 6 or higher? You check the dividend yield of the stock, then you check that that yield is greater than the yield to maturity of the 10 year note. Is that correct? How do you come up with a score greater than 6?

(06-01-2015, 05:44 PM)800peace Wrote: There's a genius accounting Prof. named Piotroski, and he created a brilliant financial statement analysis. Piotroski started with the observation made by Ben Grahm that stocks priced low on a price-to-book basis tended to outperform the market. Admittedly, many companies cheap on a price-to-book basis, are really a red flag that failure is on the horizon. Piotroski found a way to separate winners from losers using historical financial statements.

Piotroski's investment strategy applies a nine criteria binary scoring system to the cheapest 20% of the market on a price/book basis. A score of 7, 8, or 9 suggest taking a long position. A score of 1, 2, or 3 suggest taking a short position.

In Piotroski's article he suggest further research be done with different valuation metrics other than price-to-book. I've decided to replace the price-to-book criteria with "Current Dividend Yield > Yield to Maturity of the 10-yr T-Note." Accepting scores >6, I accomplish alpha and a 23% CAGR of dividends since 01/1999.

[Jimbo]

I don't know, sounds like way to much. I think looking at the fundamentals and the stock itself is enough work. To turn over every stone and examine under a microscope is way too much.
But hey, if it works for you.

[800peace]

(06-01-2015, 07:00 PM)Jimbo Wrote: I don't know, sounds like way to much. I think looking at the fundamentals and the stock itself is enough work. To turn over every stone and examine under a microscope is way too much.
But hey, if it works for you.

Actually, I have great technology... All I need is financial literacy and the will to program.

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(06-01-2015, 06:51 PM)mikejody Wrote: Would you mind explaining the actual process of reaching scores 6 or higher? You check the dividend yield of the stock, then you check that that yield is greater than the yield to maturity of the 10 year note. Is that correct? How do you come up with a score greater than 6?

(06-01-2015, 05:44 PM)800peace Wrote: There's a genius accounting Prof. named Piotroski, and he created a brilliant financial statement analysis. Piotroski started with the observation made by Ben Grahm that stocks priced low on a price-to-book basis tended to outperform the market. Admittedly, many companies cheap on a price-to-book basis, are really a red flag that failure is on the horizon. Piotroski found a way to separate winners from losers using historical financial statements.

Piotroski's investment strategy applies a nine criteria binary scoring system to the cheapest 20% of the market on a price/book basis. A score of 7, 8, or 9 suggest taking a long position. A score of 1, 2, or 3 suggest taking a short position.

In Piotroski's article he suggest further research be done with different valuation metrics other than price-to-book. I've decided to replace the price-to-book criteria with "Current Dividend Yield > Yield to Maturity of the 10-yr T-Note." Accepting scores >6, I accomplish alpha and a 23% CAGR of dividends since 01/1999.

Piotroski developed an "F-Score" from nine metrics. For every metric that is passed, there is a point. If a company passes 7 metrics, it has a F-Score of 7. The metrics are as follows:

PROFITABILITY
Positive return on assets in the current year (1 point).
Positive operating cash flow in the current year (1 point).
Higher return on assets (ROA) in the current period compared to the ROA in the previous year (1 point).
Cash flow from operations are greater than ROA (1 point)

LEVERAGE, LIQUIDITY, and SOURCE of FUNDS
Lower ratio of long term debt to in the current period compared value in the previous year (1 point).
Higher current ratio this year compared to the previous year (1 point).
No new shares were issued in the last year (1 point).

OPERATING EFFICIENCY
A higher gross margin compared to the previous year (1 point).
A higher asset turnover ratio compared to the previous year (1 point).