As noted in a previous article I work full time so, by definition, my investing activities must be part time. I am not an investment professional and I cannot devote the time and energy necessary to study a company's balance sheet and income statement to try to figure out if it is a good investment. Not only don't I have the time, but honestly, I wouldn't know what I was looking at. I've tried many times and I quickly get lost. What I am interested in are methods which can be used by just a regular guy, like me, who wants to control his own investments, but who can't spend many hours each day evaluating stocks and companies. I've read many books on investing, listened to the financial "experts", studied IBD, AAII and the WSJ, and yet with all the knowledge that they have about markets and investing, they don't seem to be able to either beat the market on a regular basis, or do better then a simple dividend growth investing plan. So for me I have found it is best to use my Keep It Simple, Stupid (KISS) method of investing. I look at a few very basic metrics, mostly the earnings and dividend history, to find good companies to invest in.
If the earnings and dividends are in good shape I figure the company most likely is a good investment. In terms of earnings, I am looking for a company with steady earnings growth, year after year. I will accept a down year or two (out of the past 10), only if the following year the up trend continues.
For the dividend history I look to David Fish's list of Dividend Challenger's, Contenders, and Champions. The company must have been increasing dividends for at least the past 5 years, preferably 10 or more, and I would like a 5 and 10 year dividend growth rate of over 10%. The payout ratio should be below 60%.
I also look at the company's S&P rating. I don't trust in my own ability to rate the financial strength of companies, so I rely on S&P. If they give it 4 or 5 stars, that is good enough for me. Finally, I look at the F.A.S.T. Graph to see if the stock appears to be over or under priced based on the earnings, and if it shows a steady up trend in those earnings.
Once I have bought a stock I have only two criteria for deciding whether or not to sell it. If the company freezes or cuts its dividend I will sell it. Also, if the company becomes too large a percentage of my portfolio I will sell some of it to maintain balance and diversity. Otherwise, as long the company continues to raise its dividend year after year, I will continue to hold it.
The only other decision I have to make is when it comes time to rebalance my portfolio. Using the quarterly contributions I receive in my pension account, and using funds from stocks that I sold, either due to a dividend cut, or due to becoming too large a portion of my portfolio, I will start either a new position in a stock that meets my criteria, or I will buy more shares of a stock I already own that appears to be undervalued. To determine which stocks are undervalued I calculate the Percentage Above the Average Yield (PAAY). If the stock has a yield that is higher than usual (for that stock) it is an indication to me that it is undervalued, and I will put more funds into it. I will also check the stock's F.A.S.T. Graph.
That is it. The EPS record, dividend record, S&P rating, and the FAST Graph, for buying stocks, a dividend cut as a sell signal, and PAAY for rebalancing. All else to me is noise and overkill.
To demonstrate how I use my KISS dividend analyses I will compare Microsoft (MSFT), Aflac (AFL), and AT&T (T). I am presenting my evaluation so that other "amateur" investors who are overwhelmed by the technical speak of the financial industry and all the confusing financial information out there may have a simpler way of looking at things.
Excerpts from the S&P report about Aflac
Corporate Overview Aflac is the number one provider of voluntary insurance at the worksite in the U.S. and the number one life insurance company in terms of individual insurance policies in force in Japan, providing financial protection to more than 50 million people. Aflac voluntary insurance products pay cash benefits directly to the insured to help protect against income and asset loss when a specific health event or life situation causes
Financial Trends Total revenues increased 57% from $13.0 billion in 2007 to $20.4 billion in 2011, while net earnings rose 20% from $1.6 billion to about $2.0 billion. Aflac has increased its annual dividend for 29 consecutive years, and we expect further dividend increases going forward.
Outlook For AFL's U.S. business, we expect revenues, after rising 3.8% in 2011, to advance in the low/mid-single digits in 2012 and 2013, on strength in core traditional and broker sales channels. We see pretax margins of around 18% in 2012 and 2013. We forecast operating EPS of $6.63 in 2012 and $7.00 in 2013, excluding any realized investment gains or losses.
Will S&P's outlook come true? I have no idea. What I do know is the earnings and dividend history, and that is what I base my evaluation on.
EARNINGS. The earnings have consistently moved higher over the past 10 years. Earnings dropped in 2004 and 2009, but immediately continued the uptrend the following year. 2012 earnings are expected to be over $6.00, once again over coming the drop in 2011 earnings. Over all, as seen in the FAST graph, AFL has a stable uptrend in earnings. (PASS)
DIVIDEND. AFL has raised its dividend every year for the past 30 years, has an average 5 year growth rate of about 17%, A 10 yr growth rate of about 20%, and a payout ratio consistently below 30%. (PASS)
S&P RATING. AFL has a rating from S&P of 5 stars (out of five). I look for stocks that are rated either 4 or 5 stars. The S&P website shows that stocks with a rating of 4 or 5 stars significantly outperform stocks rated 3 stars or lower. (PASS)
F.A.S.T. GRAPH. Aflac's F.A.S.T. graph shows that the current stock price is below the level which would be predicted by its earnings growth (the orange line). This is an indication that AFL is undervalued. (PASS)
Aflac passes all four of my buy criteria so, to me, AFL is a BUY
Excerpts from the S&P report about Microsoft
Corporate Overview. Microsoft is the world's largest software maker, primarily as a result of its near monopoly position in desktop operating systems and its Office productivity suite. The company has been slowly shifting its business strategy from a PC-centric computing environment to a computing platform in which diverse devices will access information on the Internet. In the coming years, MSFT will focus on creating seamless user experiences across multiple devices, from PCs to cell phones to PDAs to home entertainment consoles and devices, for all the various tasks users engage in, from communications to productivity to ecommerce to entertainment.
Outlook We expect revenues to rise 8.5% in FY 13 (Jun.) and 7.0% in FY 14, following 5.4% growth in FY 12. We see Windows and Windows Live revenue up 18% in FY 13 and 2% in FY 14, driven by an improving PC landscape and the upcoming launch of Windows 8. We project about 9% growth in Server and Tools in FY 13 and 8% in FY 14. We estimate about 6% growth in Microsoft Business in FY 13 and 12% in FY 14, on stronger enterprise spending and product upgrades. We see Entertainment and Devices revenue down 4% in FY 13 and up 5% in FY 14, including Skype and the Xbox platform. For MSFT's Online Service division in the respective fiscal years, we forecast 11% and 2% growth.
Will these numbers be accurate? Nobody knows. All that I can do is evaluate MSFT based on it's earnings and dividend history.
*Includes a $3.00 per share special dividend
EARNINGS. The earnings have consistently moved higher over the past 10 years. Earnings dropped in 2004 and 2009, but immediately continued the uptrend the following year. 2012 earnings are expected to be about $2.90, once again over coming the drop in 2012 earnings. Over all, as seen in the FAST graph, MSFT has a steady uptrend in earnings. (PASS)
DIVIDEND. MSFT has raised its dividend every year for the past 9 years, has an average 5 year growth rate of about 12.9%, and a payout ratio consistently below 30%. (PASS)
S&P RATING. MSFT has a rating from S&P of 5 stars (out of five). I look for stocks that are rated either 4 or 5 stars. The S&P website shows that stocks with a rating of 4 or 5 stars significantly outperform stocks rated 3 stars or lower. (PASS)
F.A.S.T. GRAPH. Microsoft's F.A.S.T. graph shows that the current stock price is below the level which would be predicted by its earnings growth (the orange line). This is an indication that MSFT is undervalued. (PASS)
Microsoft passes all four of my buy criteria, so, to me MSFT is a BUY
Excerpts from the S&P report about AT&T
Corporate Overview The current AT&T Inc. represents the combination of SBC Communications with the assets of AT&T Corp. that were acquired in November 2005. At the end of 2006, T closed on its acquisition of BellSouth (BLS) for $86 billion in stock. As of June 2012, the company had 37 million voice connections (down 10.8% from a year earlier) and 16.4 million broadband connections (down 0.2%). With the acquisition of BLS, T took full control of Cingular Wireless, now the second largest U.S. carrier with 105 million subscribers (up 6.7% from a year earlier), 70 million of which are post-paid customers, and expanded its wireline presence into the southeastern U.S. In early 2007, Cingular was renamed AT&T Mobility.
Outlook We forecast that revenues will rise to $127 billion in 2012 and $130 billion in 2013. We look for wireless revenue to advance 5% in 2013, on customer additions and faster growth in wireless data services, as pricing plans were recently changed. We see operating margins widening to 19.3% in 2012 and 20.1% in 2013, from 17.7% in 2011. We look for margin pressure in the fourth quarter of 2012. We estimate EPS of $2.43 for 2012, aided by share repurchase activity throughout the year. We expect capital spending, primarily focused on wireless, to decrease modestly in 2012. We look for EPS growth to $2.62 in 2013.
Will AT&T hit these numbers? Only time will tell. All that I know is what the earnings and dividend history tells me. And that is how I evaluate AT&T.
EARNINGS. The earnings for AT&T have been inconsistent, and fell significantly in 2011. Over all, as seen in the FAST graph, T does not have a steady uptrend in earnings. (FAIL)
DIVIDEND. T has raised its dividend every year for the past 7 years, but it has an average 5 year growth rate of only about 4.4%, and a payout ratio consistently above 70%. (FAIL)
S&P RATING. T has a rating from S&P of 3 stars (out of five). I look for stocks that are rated either 4 or 5 stars. The S&P website shows that stocks with a rating of 4 or 5 stars significantly outperform stocks rated 3 stars or lower. (FAIL)
F.A.S.T. GRAPH. Microsoft's F.A.S.T. graph shows that the current stock price is right about at the level which would be predicted by its earnings growth (the orange line). This is an indication that T is fairly valued. (FAIL)
AT&T fails all four of my buy criteria so, to me, T is NOT a stock I would buy.
All this information was obtained from S&P, David Fish's CCC list, and F.A.S.T. graphs. It is very easy to find, is inexpensive, and only takes about 5 minutes to do the evaluation. By following these criteria I believe I will produce a very strong portfolio of solid DGI stocks that will serve me well over the next 10-20 years.
Thank you for reading my article. I welcome your comments.
Additional disclosure: I am not an investment professional and nothing I am saying in this article should be construed as advice for anybody. I am simply discussing my KISS investment method and how I use it for stock selection. Before buying or selling any stock readers should do their own research and make their own decisions about investing.