This is a continuation from this article, which is one of a two-part series of how I research dividend stocks. This article talks about how I go into more details while researching a totally new company, and why they are important in the investor's quest to successfully investing in dividend stocks.
After getting a list of stocks, no matter whether the list had been gotten from a screener, as shown in Part 1 of this series or a list of stocks that has been chosen for a few of their qualities, I feel that this step is always immensely important in getting to know about these companies better.
1. Understand More About Its Business
The first thing I do when I have a potential candidate in mind is to check out a certain company's business. To sustain a dividend, earnings come into play, which needs a sound business model to sustain. Do not solely understand a company you like vaguely, go all out to understand it! Only then can you decide if a company is suitable for your portfolio. But, if you do not understand a certain company, my suggestion for you is not to own it at all. Famous fund manager Peter Lynch, has stressed, in all his books, that investors have to understand companies they own well.
2. General EPS Trend and Distortions To EPS (Any Charges)
After the first, most important step, I would check out a company's EPS numbers over the past 10 years. Such a list can be found on the Money MSN website, here. I would normally like to see constant increases in earnings and sales, like in the example of Wal-Mart Stores (WMT), whose specific numbers are shown in the table below. As I had written in part 1 of the series, I believe in the importance of EPS numbers, and are similarly immensely important to dividend stocks, with earnings being a necessity for dividend growth and sustainability.
The thing I do if I see large drops in EPS, or a large difference between trailing P/E and forward P/E is to check conference calls, which can be found here on Seeking Alpha itself for any one time charges, or distortions to a company's EPS. I do not have to do this for most dividend companies, but the companies that generally have such distortions are healthcare stocks like Johnson & Johnson (JNJ), or capital-intensive telecom companies like AT&T (T) or Verizon (VZ), especially when AT&T experienced large impacts of its EPS due to its failed T-Mobile (TMUS) merger a year back.
Be sure to check for these discrepancies before concluding that a company is not fit for investment solely because the numbers were not adjusted.
3. Financial Statements
Following this, I would check out a company's financial statements and other such information. I would normally use the Money MSN financial statements (here), or the financial statements Yahoo! Finance offers (here) to find this information. Money MSN offers five years of statements while Yahoo! Finance offers three.
At this stage, I would mainly be focusing on the balance sheet and the cash flow statement. For those unfamiliar with these statements, the balance sheet shows a company's assets as well as liabilities, while the cash flow statements indicate how a company's cash pile has increased or decreased over a period. Scroll to the "balance sheet" section of this article to take a look at how I analyze balance sheets.
4. Conference Calls/Annual Reports
I would now read and scrutinize annual reports and conference calls, if everything goes smoothly so far- I have to like and understand a company's business model, be satisfied with its EPS and dividend growth figures, and conclude that its financial statements are healthy enough for an investment.
Through doing this, I want to make sure I know what the company's future plans are. Conference calls and annual reports will drop clues, such as whether the company is going to invest more in a certain area of its business going forward, or whether it is planning to create even more shareholder value either through dividend payments or share buybacks.
Such reports can also signal impending disaster when a company is facing more difficult times, and analyzing such reports, especially when we have no background information about the company, can truly benefit us by saving us from capital losses.
5. Negative Points, Risks
Finally, the last thing I do before I put my money in a company's stock is to look for any negative points about the company, and the risks involved in investing in it. However impressive a company is, it will definitely have a flaw of some sort. These flaws can range from having increased beef prices [for food companies, such as McDonald's and Texas Roadhouse (TXRH)] to having risks of being too volatile in past recessions [In the case of Aflac (AFL) and Tupperware (TUP)].
Even with a long thesis of a certain company in hand and some negative points already, I still recommend reading articles (it can be found right here on Seeking Alpha!) with short theses, to aid in having a non-biased all-rounded analysis.
This concludes the two-part article about how I research completely new dividend stocks, from finding and identifying it to researching it properly. I would also greatly appreciate it if you could offer me some comments about this article in the comment box below.