How to Read My Stock Analysis Reports

by Dividend Growth Investor | September 27, 2013 1:00 am

I usually try to analyze one dividend paying company every week. In a typical stock analysis report, I would outline the years of consecutive dividend increases along with the amount and timing of the latest dividend increase.

I would then look at trends in stock prices, earnings per share, dividends, dividend payout ratios and returns on equity over the preceding decade. Right under earnings per share, I typically try to discuss qualitative factors that might drive future profitability. Basically in the article I discuss how I like a record of dividend growth, earnings growth and a sustainable dividend payout ratio. If the stock has these traits, I then focus on valuation.

In my conclusion section, I usually link to my article on entry criteria[1] when I call a stock attractively, fully or overvalued. In my article on entry criteria I discuss that I am not willing to pay more than 20 times earnings for a stock and require at least a 2.50% in minimum yield. If the company trades at less than 20 times earnings, and yields more than 2.50%, I would call it attractively valued and call it a day.

However, if the stock trades above 20 times earnings or yields below 2.50%, I would try to calculate a reasonable price which would make it a good buy on dips. This entry criteria applies to most corporations that pay dividends and are traded on exchanges.

For example, Automated Data Processing (ADP[2]) trades at 25.80 times earnings, which is above the price I am willing to pay for it. If it earns $2.89 per share, at 20 times earnings, the most I would pay is $58 per share. Hence, if I posted an analysis on ADP[3] I would say it is overvalued at 25 times earnings, and would buy on dips below $59.

If Automated Data Processing traded at $50 per share, and earned $3 per share, I would say it is attractively valued at the moment. For example, in my analysis of Wal-Mart (WMT[4]), I discussed that I thought the stock was attractively valued at the moment. Hence, I recently bought some[5] for my 2013 Roth IRA.

I link to my entry criteria article, because I want readers to understand how I value company stock. For Automated Data Processing I assigned an entry price of $59 at $2.90 per share in earnings per share. If you read the article in 12 months and the stock trades at $70 but earns $4 per share, you would think it is above fair value and ignore it completely for that reason.

However, at $70, the stock would have been attractively valued

Readers would notice that I do not assign “fair values” to stocks I analyze. I am not going to complicate my screens by using discount rates, forecasting future dividend payments and discounting them back etc.

Instead I use the P/E and yield as mentioned above. However, I do select companies that have raised dividends for at least a decade[6], and which usually have done so above the rate of inflation. In the end, yield and dividend growth is a balancing act.

I select companies that have not only raised dividends by say over 5% to 6%, but I believe also have a decent shot of continuing that in the foreseeable future. I expect dividends to grow over time, I just don’t want to overcomplicate things by assigning forecasted values and proving my point mathematically. I would avoid doing math since I can mention my expectations with one single sentence or less, and have them already built into the assumption.

Check my four latest analyses of dividend paying stocks below:

Full Dislosure: Long ADP, WMT, KO, MCD, APD, XOM

  1. link to my article on entry criteria:
  2. ADP:
  3. an analysis on ADP:
  4. WMT:
  5. I recently bought some:
  6. for at least a decade:
  7. Coca-Cola (KO): A Core Holding for Dividend Growth Investors:
  8. McDonald’s Corporation (MCD) Dividend Stock Analysis:
  9. Air Products and Chemicals (APD) Dividend Stock Analysis:
  10. Exxon Mobil (XOM) – An Undervalued Dividend Machine:

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