Today I’m going to show you how I go about selecting a company whose stock I want to buy mainly to collect their growing dividends. As a general rule of thumb, unless I am very familiar with the business & have personally bought something from said business, I won’t even touch a company that is worth less than 1 billion dollars in market cap value. Stocks worth less than that aren’t even on my radar. Why? Because most companies trade at some multiple to sales and I want to filter out any company that doesn’t at least have a billion dollars in annual sales (unless there is rapid sales growth as is the case in lululemon et. al.). Now I’m going to show you step by step exactly what I do when researching a company. I’ve been investing now for over 4 years, so a lot of this stuff I’ve picked up along the way. I’m about to drop some serious investing knowledge on your asses.
1) I go to FinViz and search for US companies that pay at least a 3% dividend and arrange the list in descending order from largest market cap to smaller. I choose US only companies because companies that are incorporated and / or domiciled outside of the US sometimes have countries have what is called a Dividend Withholding tax that gets taken from your dividend payment by the foreign country before you get paid. In some instances you can get refunded this tax from the IRS but it can be a bit complicated & I would just rather avoid the hassle. There are plenty of great companies right here in the US. Now from this list you will get universally known brands such as GE, Microsoft, Chevron, Johnson & Johnson, Procter & Gamble, etc. These are gigantic multi-billion dollar companies that have the lowest probability of going bankrupt and the highest probability of growing their dividends overtime. I don’t exclusive invest in mega caps but these are among the least riskiest investments you could make in the stock market.
2) For this example, I’m going to analyse $INTC. First I will go to the Yahoo Finance Intel page.
Here I am only really looking for 2 things, what is its market cap and what is its dividend (according to Yahoo at least, which isn’t always accurate so double check it with other sources, like SEC filings or company press releases).
3) Then I look at the “Key Statistics” part of the site.
Here I’m primarily looking at 5 things, prices/sales, revenue, income, net debt to income (if there is any debt, which there might not be), and payout ratios. So as we can see here INTC trades at a 100.29 billion dollar market cap and it earned 57.75B in the trailing twelve months (ttm) and thus has a price to sales ratio of 1.87x (according to Yahoo). This is simply a valuation metric that you can use to get a sense of how cheap or expensive this company is relative to other companies in the same industry. For example, if ARMH was trading at 18x sales and QCOM at 6x sales, then all else being equal INTC would be the cheapest of the bunch. Of course not all things are equal and ARMH and QCOM are growing much more rapidly than INTC and thus are going to trade at a higher multiple than it. Many things play a factor in why some companies get valued more richly than other, but in general the a better, faster growing, company with low to no debt will have a higher multiple than a bad company, losing market share, with a sizable amount of debt. You can also see that its revenue per shares is 10.70 and its current stock price is 20.15 which is roughly 2x sales. We can also see that year-over-year (yoy, that is from last December to this December) sales decreased by 5.5% and earnings fell by 14%. That is obviously not good but if you believe this is only a temporary slow down it is what is creating a great buying opportunity in the stock. Also, I generally like looking at 2 year growth trends which I will highlight further down. Now here is a really important balance sheet analysis, debt to cash and net debt to income. Intel has 7.25B in debt as of their most recent quarter (mrq) and 10.50B in cash (or cash equivalents which are usually treasuries or other cash like paper). Fortunately, Intel is in a strong liquidity position as it has more cash than it does debt. Clearly, it is almost always better to have more cash than debt but this is not always a deal breaker. It’s net debt is -3.25 (7.25 in debt – 10.5 in cash) which simply means it has no net debt, which further means that the company has no leverage. Now if the opposite was true and it had 10.5B in debt vs 7.25B in cash then it would have 3.25B in net debt and here is why having some debt is not necessarily a huge issue. As you can see Intel had 11.9B in profits in the ttm, which means that its net debt to income ratio is only 0.27 (3.25 in debt dividend by the 11.9B in cash). This means that it would only take intel 3.2 months to generate enough profits to pay off its entire debt if it so chose too. If on the other hand it had ten times as much net debt, 32.5B, then it would take it 2.7 years to generate enough profits to completely pay off its debt. Another way to think of this is using a personal example. If you make say, 50K dollars (after-tax) per year but you have student loan, car, and credit card debt of 250K, you are leveraged 5-to-1 and it will take you at least 5 years (if you spent all of your money on it) paying off all of your debt. This is clearly not a good situation for an individual or a corporation. I typically try to avoid companies that have 3x as much debt than they generate in profits but again, it depends on the terms, maturity, and cost of the debt. For example, if the debt matures over 30 years and it only costs 2% per year, it’s probably not a big issue. Lastly, I look at the dividend payout ratio. This is the ratio of annual dividends per share to earnings per share (EPS). Intel is currently paying out 0.90 cents per share every year and in the ttm it made 2.29 cents per share in profits. Meaning that it is only paying out 39% of its earnings as dividends. This is a good thing because for example, you would never want to own a company that was paying out more in dividends than it was actually generating in profits. In other words, if a company is only making 2 in EPS but is paying out a 2.5 annual dividend that means its payout ratio is 125%. So the question is, where is that extra 25% coming from if they are not earning it? Most likely they are borrowing the money, increasing their debt to payout the dividend. This is not sustainable and eventually the dividend will have to be cut (which will cause the stock to take a major hit). So look for companies that have a payout ratio somewhere in the range of 25 to 50% as the company does need to reinvest some of their profits back into the business to continue growing and expanding (capital expenditures).
4) Then I go to yCharts and check out a visual graph of the company’s sales, gross profit, and net income. As we can see here over the last 2 years, inte’s sales were up 23%, their gross profit was up 20% and their net income was up 3.8%. The most important growth metric in any business is the top line (sales/revenues) as long as the company is selling more and more products everything else can be fixed buy cutting costs and finding inefficiencies to get profits and margins growing again. And remember, if sales increase but the market cap of the company stays the same of declines, it makes the company cheaper on the price to sales valuation metric. Or in other words, if the multiple stays the same while the sales are increasing, the stock will go higher. Also, growing sales should eventually result in growing earnings, which means higher and higher dividend payments and it is this “variable” or growing dividend income that is what makes dividends so much more attractive than the fixed-income you can get in bonds. Make no question about it, corporate bonds are much safer and less risky than stocks; however, if you bought the bonds at a 4% yield, that amount will never change, you will only ever get paid that 4% per year (fixed-income). With stocks however, if the annual dividend payment increases from $4 per share to $8 per share over a 5 year period, assuming you bought the stock at $100, then your dividend yield will increase from 4% to 8%. In other words, your dividend income will have double. So you definitely want to see growth.
5) then I got to DiviData and check out a chart of Intel’s dividend and how much it has grown over the last few years.
As we can see here, Intel has had a steadily growing dividend since at least 2003 when they paid out only 2 cents per share, today the pay out 22.5 cents per share. So in the last 9 years their dividend has increased by over 10 times. Meaning that if you had bought the stock back then (in 2003) at say a 1.5% yield, your yield today would be 15% on that Intel stock, and that right there is the holy grail of dividend investing. You could compute it’s 3 year compound annual growth rate to see how quickly the dividend is growing right now on excel but fortunately Zecco has a stock screener that not only computes that growth rate for you but also lets your arrange all of the stocks in order from the fastest dividend growers to the slowest. As a note, INTC’s 3 year CAGR of its dividend is currently 31.8%, which is much faster than inflation.
6) There are a few other things that I like to do before buying the stock. I like going to the company’s investor relations website and corporate website and seeing if they have a YouTube channel or any videos that can help people understand what the company is all about. OXY, WM, and LULU, just to name a few, are great companies that have pretty long, professionally produced corporate / investor videos that show what the company does, and shows the CEO and other execs talking to investors about their vision and goals. I also like listening to the most recent quarterly earnings call to hear what management has to say and also what issues the analysts are bringing up during the Q&A session. Additionally, I will Google the company and see what has recently been in the news about them about things that they have said or done, what competitors have said, if they are in legal battles, if congress is thinking about passing some new law, etc. Just to know what is out there about them to avoid risk.
So, congratulations! If you’ve made it this far down without falling to sleep yet, it means you are a serious investor. If you are new to this and have any questions, feel free to ask me on twitter @elwalvador . I’ve been doing this for years and am a wealth of knowledge when it comes to trading and investing. I know almost everything that one could possibly know about financial markets and I hope to keep sharing my knowledge with you guys, here on my blog. Until next time, have a good day y’all.