DG newbie

[Amos]

Hey there,
I'm new to this investing idea and I was hoping to get some clarifications about the how-to's. Besides the recorded years and dividend yields, what about the following?

Debt/Equity: Is there any recommendation about the DE of a company that I should consider?

Price/Earning: Same goes here. I know PE is per sector and 15 for one company can be consider as normal and high/low for another one but assuming it fits into the other "rules", does it have any importance?

payment/ratio: Any recommendations here?

Return on Equity: Any recommendations here?

Past 5y growth and Estimate 5y growth: Any recommendations here?

Price/Book: Any recommendations here? Which is more important here, if at all, PB, PE or both?

I saw Dave Fish's spreadsheet and Peter Grossman's screener and wrote a small (very basic) app that takes the screener info into a grid where you can do a very flexible filtering on the data. As I mention, for now it is very basic but it's a small executable and requires no prerequisites. May this interest anyone?

Thanks

[navyasw02]

I dont get too heavy into analysis, but I'd recommend PEs less than the current SP500, payout ratio <60-70ish%, from the dividend growers on the list you mentioned. Also I looked at index fund holdings that match my investment style. I just made a watch list on yahoo, put about 150-200 or so stocks on there and spent a few days reading posts here and on a lot of blogs and on seeking alpha regarding those companies and whittled it down to the stocks I'm actively tracking. I've moved the watch list to my fidelity account and set price triggers for the ones I'm serious about and just wait for something to pop.

[Amos]

(07-11-2015, 04:42 PM)navyasw02 Wrote: I dont get too heavy into analysis, but I'd recommend PEs less than the current SP500, payout ratio <60-70ish%, from the dividend growers on the list you mentioned. Also I looked at index fund holdings that match my investment style. I just made a watch list on yahoo, put about 150-200 or so stocks on there and spent a few days reading posts here and on a lot of blogs and on seeking alpha regarding those companies and whittled it down to the stocks I'm actively tracking. I've moved the watch list to my fidelity account and set price triggers for the ones I'm serious about and just wait for something to pop.

Thank you for your reply.

The Excel contains 600+ stocks so I read several blogs to understand the criteria for filtering out stocks that are less attractive. For example, div yield of 2.5-5 percent and cap market of over 1B$ (and more). I want to know what is the risk regarding the columns I mentioned, so I will apply the filter based on my desired risk.

Now I have 124 stocks in the list and I was thinking of simply purchase them based on a certain sorting (recorded years (asc) and div yield (desc)) but I want to make sure what is the meaning of the other columns.

[Dividend Watcher]

Amos, welcome to the forum!

Before I begin and since you are new here and also a new investor, it would help if you told us a little about yourself in the Introductions section. At various stages of life, our replies may be worded differently depending on the circumstances. Regardless, glad you're here. Now let's see if I can help answer anything ...

First, as a new investor, you may feel overwhelmed with all these terms and concepts at first. Don't be intimidated; eventually you'll know what everyone is talking about and you'll be knowledgeable enough to discern what's of interest to you.

(07-11-2015, 02:27 PM)Amos Wrote: Debt/Equity: Is there any recommendation about the DE of a company that I should consider?

This is a tough one. To see why I say that, you might want to refer to my equity primer I wrote here. It may be instructive to read through the example company section where RoE varies so much yet the company's business results don't change.

Everyone wants a company that has little to no debt. However, debt, when used responsibly, can help a company grow. When they use it to invest in plants or major equipment, this can be to a company's benefit over the long term.

Personally, I usually screen for debt/equity of <80% (<40% of debt/capital) for most stocks. Utilities often have large outstanding debt balances. To see if debt is out of line, you may want to compare the company's balance sheet with others in the same industry.

(07-11-2015, 02:27 PM)Amos Wrote: Price/Earning: Same goes here. I know PE is per sector and 15 for one company can be consider as normal and high/low for another one but assuming it fits into the other "rules", does it have any importance?

P/E has an enormous importance in evaluating whether the stock price is at a fair value or not. To answer more fully, I'll quote Chuck Carnevale over at Seeking Alpha:

Quote:First of all, I do not believe it's a mere coincidence that the 200-year average P/E ratio of the S&P 500 has also been approximately 15. A complete understanding of the P/E ratio as a valuation metric includes the realization that it is also a short form DCF (discounting cash flow) formula in its own right. A P/E ratio of 15 represents an earnings yield of 6.67%. (This calculation is easily made by reversing the numerator and denominator of the P/E ratio to E/P.)

Additionally, a P/E ratio of 15 represents a valuation metric of a current earnings yield that also closely correlates with the long-term rate of return (6% to 8%) that stocks have delivered when valuations were aligned with intrinsic value (P/E 15). Without further elaboration, my contention is that a 6% to 8% return is a rational expectation of what a typical or average company can be expected to generate over the long run. Admittedly, P/E ratio of 15 does not apply to all stocks, but research, observation and long experience have convinced me of the relevance and importance of the P/E ratio of 15 as a valuation guide.

The full article is here.

(07-11-2015, 02:27 PM)Amos Wrote: payment/ratio: Any recommendations here?

I am assuming you mean payout ratio or how much of net earnings is distributed through dividends.

I personally prefer it under 60% to allow cash retention to be used to grow the company. Again, utilities tend to have higher payout ratios as well as some large corporations that don't have a need for high cash balances to keep the company growing.

(07-11-2015, 02:27 PM)Amos Wrote: Return on Equity: Any recommendations here?

Again, I refer you to my equity primer linked above.

(07-11-2015, 02:27 PM)Amos Wrote: Past 5y growth and Estimate 5y growth: Any recommendations here?

Depends on what your are looking for in a company. Positive is a good starting point. I prefer it above 5% going forward but not so much for past history.

(07-11-2015, 02:27 PM)Amos Wrote: Price/Book: Any recommendations here? Which is more important here, if at all, PB, PE or both?

Depends on how you define book value. Again, the primer on equity would help explain my tendency to ignore statistics containing equity without a deep dive into the balance sheet and its attendant notes.

To me, P/E is much more valuable than P/B.

Hope that helps answer your questions somewhat. If you're still confused, ask away.

[Amos]

Thank you very much for your warmth welcome.

At the moment I invest in indexes only and lately I came around the DG idea so I wanted to dig more into it and understand the different variables. It does require some mind changing regarding the fact that a research is needed unlike investing in indexes.

Your explanation was wonderful and enlightening, I do have a question regarding the "Past 5y growth and Estimate 5y growth", I understand it doesn't talk about divs but about earning from divs (company point of view)? If so, if a company applies all the other rules but the past or estimate values are negative, will it be a deal breaker? I try to link the value to the risk because eventually I need to set my risk and select the stocks accordingly.

Again, thank you very much for your reply.

[earthtodan]

The rabbit hole of valuation analysis never ends, but the basic measure of a stock's valuation is P/E. P/E itself can be misleading because the "E" is not a simple statement the company's cash flows, but contains non-cash, intangible expenses, and expenses incurred in the past or future (such as depreciation, amortization, and money set aside for potential settlement of lawsuits). Cash flows are also stated quarterly, but are not necessarily a good alternative to Earnings because all the accounting considerations mentioned above do matter.

A simple way of comparing the P/E ratio to the growth is the PEG, or (P/E)/5 year growth. The PEG ratio is defined differently by different people depending on whether they use trailing or forward P/E and earnings growth figures. The rule of thumb is that below 1 is cheap (EPS growth is higher than the P/E), between 1 and 2 is fair, and above 2 is getting expensive.

Then again, future growth estimates are just that. You could make a solid case that since stocks trade on expectations, finding value in the market means buying companies whose future growth estimates are mistakenly too low, and avoiding those whose estimates are too high. For example, QCOM used to have double digit future EPS growth estimates, and CVX single digits. Now QCOM shows a single digit consensus, and CVX is negative. Both stocks have fallen as the expectations around them have re-rated downward.

This is not to say that you should try to be smarter than the analysts, but simply that valuation figures and growth estimates should not be taken at face value.

A high P/E doesn't necessarily mean a stock is overpriced, and a low P/E doesn't necessarily mean a stock is cheap. MU has had double digit past and future EPS growth figures for a while now, and the P/E is well below 10. Yet it has been a terrible investment over the past year. SBUX once showed a trailing P/E in the hundreds (due to a legal settlement), and a forward P/E of around 30. SBUX has performed like a champ, and the forward P/E is still 30 a year later as the earnings have kept up. And there are plenty of companies whose valuations I just can't make sense of.

I recommend reading articles on Investopedia.com to get familiar with the basic accounting and valuation terms, and buy companies that you know to be high quality when the valuation looks reasonable.

[benjamen]

D/E ratio: What is the industry current and 5/10 year average? What is the 5/10 year average for this company?

P/E ratio: This will also vary a bit by industry or what you are trying to do. Growth chasers may say a max of 30, most seem to say a max of 20, and a max of 15 is conservative.

Payment ratio (dividend yield?): Like a broken record, this varies by industry. REITs, utilities, telecoms, and tobacco tend to have higher average payout ratios. Outside those areas, 60% is a common threshold.

ROE: I don't pay this as much attention as I should.

Past and future 5 year growth: I would look up the "Chowder Rule". Essentially this is equal to (dividend yield + past 5 year dividend growth rate). Generally. for Telecom/Utilities stay above 8%, for all others stay above 12%.

I also break down the dividend growth rate here:
http://dividendgrowthforum.com/showthread.php?tid=1244

[Amos]

Thank you benjamen.

A general question if I may: I took the Fish's list and filtered out stocks based on the explanation here and based on other places I've read and came to a list of 63 stocks. If I will invest the same amount in all these stocks (that was my plan), the average dividend yield will be 3.2% (before taxes). If I know correctly, the div tax is 15% so that brings me to 2.72%.

I hear so many good things about this method (specially about the fact that the yield gets higher every time) and eventually I get 2.72%? I don't belittle this and I know I can invest in higher yield stocks but we do play with stocks and that has its risks so I wonder, am I missing something here?

Thanks

[benjamen]

How I look at stocks:
1) Dividend history: How many years of dividend raises? I look at periods of flat dividends better than historical dividend cuts.
2) P/E: my personal rule is less than 20. Note, this does not apply to REITs, which have their own set of rules.
3) Payout ratio (Dividend per share/Earning per share): I like to stay under 60%. This differs for REITs, utilities, telecom, and tobacco.
4) Dividend yield: I prefer to be over 3% and I never go lower than 2.5%. I like to wait for things to go sale, which is why my average initial yield is roughly 4.2%. Remember, taxes are usually different (higher) for REITs and MLPs, which is why their yields are higher.
5) Growth: More and more I am actually looking at revenue growth. How will this company expand in the future? With more revenue growth, you will get dividend growth. Be wary of companies that are consistently raising dividends faster than they are raising revenue/profit.
6) Chowder Rule: as stated above

[Amos]

(07-13-2015, 12:36 PM)benjamen Wrote: How I look at stocks:
2) P/E: my personal rule is less than 20. Note, this does not apply to REITs, which have their own set of rules.
3) Payout ratio (Dividend per share/Earning per share): I like to stay under 60%. This differs for REITs, utilities, telecom, and tobacco.
4) Dividend yield: I prefer to be over 3% and I never go lower than 2.5%. I like to wait for things to go sale, which is why my average initial yield is roughly 4.2%. Remember, taxes are usually different (higher) for REITs and MLPs, which is why their yields are higher.
5) Growth: More and more I am actually looking at revenue growth. How will this company expand in the future? With more revenue growth, you will get dividend growth. Be wary of companies that are consistently raising dividends faster than they are raising revenue/profit.
6) Chowder Rule: as stated above

Thank you for your points. specially point 4.

2. What are your P/E numbers for REITs?
3. What are your P/R numbers for REITs, utilities, telecom, and tobacco?
4. What is your top limit for div yield? I read that above 5% is less recommended.
5-6. Thank for you the Chowder rule tip. I will apply it on the list to see what comes out.

[benjamen]

I am still learning about REITs, so I will have to defer those questions to someone else more knowledgeable.
For a payout ratio max on utilities, telecom, and tobacco, depending on your risk tolerance this is usually 80-90%. Personally, I cap this out at 85%.
For your non REIT/MLP companies, any dividend yield over 5% can be acceptable. However, I would look very closely into why the market is undervaluing this company (long term issue, short term issue, currency exchange rate issues, cyclical issues, ect).

[Amos]

Thank you very much for your detailed help!