Making the Bear Pay With Dividends and Growth

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 |  Includes: AA, ADZ, ALL, ASH, AXB, B, BEAM, BID, CAT, CBRL, CDI, CEG, CEMJQ, CMC, CR, DLX, DRI, EAT, FCX, GEF, GNW, GPI, HHS, HIG, HMN, HOG, HUBB, IGT, IR, JWN, LB, LNC, M, MOLX, MTOR, NFP, NTRI, NVE, NYX, OMX, OSK, PEG, PII, PL, PPG, PTEN, ROK, RPM, SAFT, SAH, SVU, SWK, TKR, VFC, WDR, XL
by: J Clinton Hill

Market Analysis Summary: In a bear market, panic and fear trigger irrational and indiscriminate selling of stocks at prices without the slightest consideration for fundamentals or valuations. On Wall Street, this is typically known as "throwing babies out with the bath water". Year-to-date, the SP-500 benchmark index has declined -36.66%. 

A correction of this magnitude is extraordinary, and while the trend could extend further south before a new bull market emerges, this is a good time to survey the damage.  Some of the bear market’s casualties, i.e. collaterally damaged stocks, will survive the current economic down cycle and be all the stronger and more profitable for it. Investors who can identify the potential survivors and are patient and financially solvent enough to delay immediate gratification for longer-term gains stand to be rewarded. 

Below are a few guidelines to hopefully point investors in the right direction:

1. To begin, Hillbent starts off with a universe of the SP-1500 components which represent large-caps (SP-500), mid-caps (SP-400), and small-caps (SP-600). This group of stocks will provide sufficient liquidity, research coverage, and be on the radar of most institutional money managers.

2. Because cash is king in these uncertain times, stocks generating sufficient cash flow to sustain their dividends is a primary concern. If one is going to sit around waiting for Godot or the end of this bear market, then he or she should be paid for their time and patience. Therefore, only stocks with a payout ratio of .50 or less are considered. This means that current earnings per share are at least twice the amount of scheduled annual dividends per share.

3. Not to be greedy, but another requirement is a minimum annual 4% dividend yield. Solid and generous dividends can be somewhat like shock absorbers for a portfolio during volatile market conditions. On a quarterly basis, they can also make for a nice sedative or anti-depressant in a bear market, depending upon one’s temperament.

4. In recessions, future earnings are often at risk. This is why Hillbent requires that the next 2 years of fiscal earnings per share equal at least double the current scheduled annual dividends per share and increases the odds of the dividend being maintained (if not raised).

5. Lastly, a low PEG ratio helps to separate the wheat from the chaff. This measures how much or how little one pays for growth. A low number is associated with growth at a reasonable or bargain price. Hillbent requires a ratio to be equal to or lesser than 1. Stable dividends are a primary concern, but the primary objective here is capital appreciation. 

Summary Analysis: It cannot be emphasized enough to respect the current bear market. However, if one has preserved sufficient capital, he or she can make the bear pay with solid dividends and potential growth. Out of the 56 stocks generated from the above screen, the average annual dividend yield is 6.01%; the average current payout ratio is 0.31; and the average PEG ratio is 0.57. Below is a list of the results according to their respective market capitalization status: 

SP-500: Alcoa (NYSE:AA); Allstate (NYSE:ALL); Ashland, Inc. (NYSE:ASH); Caterpillar (NYSE:CAT); Constellation Energy (NYSE:CEG); Darden Restaurants (NYSE:DRI); Eaton Corp. (NYSE:ETN); Freeport-McMoRan Copper & Gold (NYSE:FCX); Fortune Brands (FO); Genworth Financial (NYSE:GNW); Hartford Financial Services Group (NYSE:HIG); Harley-Davidson (NYSE:HOG); International Game Technology (NYSE:IGT); Ingersoll-Rand (NYSE:IR); Nordstrom, Inc. (NYSE:JWN); Lincoln National (NYSE:LNC); Limited Brands (LTD); Macy's (NYSE:M); Molex (NASDAQ:MOLX); NYSE Euronext (NYSE:NYX); Public Service Enterprise Group (NYSE:PEG); PPG Industries (NYSE:PPG); Rockwell Automation (NYSE:ROK); SuperValu, Inc. (NYSE:SVU); Stanley Works (NYSE:SWK); VF Corp. (NYSE:VFC); XL Capital (NYSE:XL)

 

SP-400: ArvinMeritor (ARM); Alexander & Baldwin (AXB); Sotheby's Holdings (NYSE:BID); Chemtura (NYSE:CEM); Commercial Metals (NYSE:CMC); Crane (NYSE:CR); Deluxe (NYSE:DLX); Brinker International (NYSE:EAT); Greif (NYSE:GEF); Harte Hanks (NYSE:HHS); Horace Mann Educators (NYSE:HMN); Hubbell (HUB.B); Oshkosh Truck (NYSE:OSK); Protective Life (NYSE:PL); Patterson-UTI Energy (NASDAQ:PTEN); RPM, Intl. (NYSE:RPM); Sierra Pacific Resources (SRP); Timken (NYSE:TKR); Waddell & Reed Financial (NYSE:WDR) 

SP-600: Barnes Group (NYSE:B); CBRL Group (NASDAQ:CBRL); CDI Corp. (NYSE:CDI); Group 1 Automotive (NYSE:GPI); National Financial Partners (NYSE:NFP); NutriSystem (NASDAQ:NTRI); OfficeMax (NYSE:OMX); Polaris Industries (NYSE:PII); Safety Insurance Group (NASDAQ:SAFT); Sonic Automotive (NYSE:SAH) 

*Disclosures: None… Note that the above list is for the purpose of assisting further research and investors are strongly encouraged to perform further due diligence on any of the above mentioned companies.