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Arie Goren, Portfolio123 (506 clicks)
Long only, value, research analyst, dividend investing
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I tried to create a good-yielding stock portfolio that can outperform the market by a big margin, but at the same time, would have a very low risk. The following screen shows such promise. I have searched for very profitable companies that are included in the Russell 3000 index that pay rich dividends and that have raised their payouts at a high rate for the last five years.

The screen's method that I use to build this portfolio requires all stocks to comply with all following demands:

  1. The stock is included in the Russell 3000 index.
  2. The stock does not trade over-the-counter (OTC).
  3. Dividend yield is greater than 2.0%.
  4. The annual rate of dividend growth over the past five years is greater than 5%.
  5. The payout ratio is less than 75%.
  6. Forward P/E is less than 15.
  7. PEG ratio is less than 1.5.
  8. Total debt to equity is less than 0.4.
  9. The twenty stocks with the lowest payout ratio among all the stocks that complied with the first eight demands.

I used the Portfolio123's powerful screener to perform the search and to run back-tests. Nonetheless, the screening method should only serve as a basis for further research. All the data for this article were taken from Portfolio123.

After running this screen on September 09, 2013, before the market open, I discovered the following twenty stocks:


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The table below presents the dividend yield, the payout ratio, the annual rate of dividend growth over the past five years, and the PEG ratio for the twenty companies.


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AXIS Capital Holdings Limited (AXS)

AXIS Capital Holdings Limited provides specialty lines insurance and treaty reinsurance products worldwide.

AXIS Capital has a very low debt (total debt to equity is only 0.20) and it has a very low trailing P/E of 8.67 and a very low forward P/E of 8.96. The price to free cash flow for the trailing 12 months is very low at 5.02, and the average annual earnings growth estimates for the next five years is at 5%. The price-to-sales ratio is at 1.19, and the price-to-book-value is very low at 0.98. The forward annual dividend yield is at 2.39%, and the payout ratio is only 26.5%. The annual rate of dividend growth over the past five years was quite high at 7.36%.

AXIS Capital Holdings has recorded good revenue, EPS and dividend growth, during the last year and the last three years, as shown in the table below.

Source: Portfolio123

On July 30 AXIS Capital reported its second-quarter financial results, which missed EPS expectations by $0.07.

Second Quarter Highlights

  • Gross premiums written increased 20% to $1.2 billion, with growth of 29% in our reinsurance segment and 16% in our insurance segment;
  • Net premiums written increased 24% to $993 million;
  • Net premiums earned increased 11% to $946 million;
  • Combined ratio of 101.7%, compared to 92.3%;
  • Current accident year loss ratio of 72.4%, compared to 63.7%;
  • Estimated natural catastrophe and weather-related pre-tax net losses (net of reinstatement premiums) of $140 million; tornadoes and hailstorms in the U.S. made the largest contribution to this amount, with flooding in Canada, Europe and Argentina also significant;
  • Net favorable prior year reserve development of $42 million (benefiting the combined ratio by 4.4 points), compared with $75 million (benefiting the combined ratio by 8.7 points);
  • Net investment income increased 12% to $83 million;
  • Pre-tax total return on cash and investments of (1.3%), compared to 0.5%;
  • Net income available to common shareholders of $72 million, compared to $168 million;
  • Operating income of $50 million, compared to $113 million;
  • Net cash flows from operations of $236 million, compared to $288 million;
  • Share repurchases in the quarter totaling $228 million;
  • Issued $225 million of 5.50% Series D preferred shares and redeemed the $100 million of 7.25% Series A preferred shares outstanding; and
  • Diluted book value per common share of $42.67, a 4% decrease during the quarter and a 5% increase over the last 12 months.

AXIS Capital has recorded good revenue, EPS and dividend growth, and considering its compelling valuation metrics and its solid earnings growth prospects, AXS stock can move higher. Furthermore, the rich dividend represents a nice income.

Since the company is rich in cash ($8.78 a share) and has a very low debt and its payout ratio is very low, there is hardly a risk that the company will reduce its dividend payment.

Risks to the expected capital gain and to the dividend payment include a downturn in the U.S. economy, and large catastrophic and weather events around the globe.


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Chart: finviz.com

Schweitzer-Mauduit International Inc. (SWM)

Schweitzer-Mauduit International, Inc. manufactures and sells paper and reconstituted tobacco products to the tobacco industry; and specialized paper products for use in various applications.


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Source: company presentation

Schweitzer-Mauduit has a very low debt (total debt to equity is only 0.31), and it has a trailing P/E of 17.15 and a low forward P/E of 14.32. The price to free cash flow for the trailing 12 months is very low at 13.80, and the average annual earnings growth estimates for the next five years is very high at 15%. The forward annual dividend yield is at 2.03%, and the payout ratio is only 27.2%. The annual rate of dividend growth over the past five years was high at 8.45%.

The SWM stock price is 4.24% above its 20-day simple moving average, 7.86% above its 50-day simple moving average and 34.39% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

Schweitzer-Mauduit has recorded strong EPS and dividend growth and mild revenue growth during, the last three years and the last five years, as shown in the table below.

Source: Portfolio123

On July 31, Schweitzer-Mauduit reported its second-quarter financial results, which beat EPS expectations by $0.07 and was in-line on revenues.

Second Quarter / Year-To-Date Financial Highlights:

  • Second quarter net sales of $196.5 million increased 2% versus the prior-year quarter; year-to-date net sales were $391.0 million
  • Second quarter Adjusted Operating Profit from Continuing Operations (see non-GAAP reconciliations) of $42.8 million was essentially unchanged from the prior-year quarter; $86.1 million year-to-date
  • Second quarter Adjusted Diluted Earnings Per Share from Continuing Operations (see non-GAAP reconciliations) was $0.95, and $1.96 year-to-date; up $0.07 and $0.17 over the comparable prior-year periods, respectively
  • Second quarter Adjusted EBITDA from Continuing Operations (see non-GAAP reconciliations) of $54.2 million increased from $52.1 million in the prior-year quarter; $108.1 million year-to-date up from $106.6 million in the prior-year period

Worldwide cigarette consumption is shifting from west to east; China alone is responsible to 39% of world production, as shown in the table below.


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Source: company presentation

Schweitzer-Mauduit has recorded good revenue, EPS and dividend growth, and considering its compelling valuation metrics and its strong earnings growth prospects, SWM stock can move higher. Furthermore, the solid dividend represents a nice income.

Since the company is rich in cash ($6.84 a share) and has a low debt and its payout ratio is very low, there is hardly a risk that the company will reduce its dividend payment.

Risks to the expected capital gain and to the dividend payment include decline in the worldwide cigarette consumption due to new anti-smoking regulation.


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Chart: finviz.com

BancFirst Corporation (BANF)

BancFirst Corporation operates as the holding company for BancFirst that provides commercial banking services to retail customers and small to medium-sized businesses.

BancFirst Corporation has a very low debt (total debt to equity is only 0.07), and it has a trailing P/E of 15.39 and a forward P/E of 15.18. The price-to-cash ratio is extremely low at 0.46, and the average annual earnings growth estimates for the next five years is high at 12%. The forward annual dividend yield is at 2.39%, and the payout ratio is only 33.2%. The annual rate of dividend growth over the past three years was high at 7.56%, and over the past five years was also high at 8.06%.

BancFirst Corporation has recorded strong EPS and dividend growth and mild revenue growth, during the last three years, as shown in the table below.

On July 18, BancFirst Corporation reported its second-quarter financial results, which beat EPS expectations by $0.01. The company reported net income of $12.6 million, or $0.81 diluted earnings per share, for the second quarter of 2013, compared to net income of $11.7 million, or $0.76 diluted earnings per share, for the second quarter of 2012. Net income for the year to-date was $26.0 million, or $1.68 per share, compared to $25.7 million, or $1.67 per share, for the first half of 2012.

BancFirst Corporation has recorded strong EPS and dividend growth, and considering its strong earnings growth prospects, BANF stock still has room to go up. Furthermore, the rich dividend represents a nice income.

Since the company is extremely rich in cash ($112.93 a share) and has almost no debt and its payout ratio is very low, there is hardly a risk that the company will reduce its dividend payment.

Risks to the expected capital gain and to the dividend payment include; a downturn in the U.S. economy and a decline in the bank's interest margin of 3.08%.


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Chart: finviz.com

Back-testing

In order to find out how such a screening formula would have performed during the last year, last 5 years and last 14 years, I ran the back-tests, which are available by the Portfolio123's screener.

The back-test takes into account running the screen every four weeks and replacing the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. The theoretical return is calculated in comparison to the benchmarks (S&P 500, Russell 3000), considering 0.25% slippage for each trade and 1.5% annual carry cost (broker cost). The back-tests results are shown in the charts and the tables below.

Since some readers could not get the same results that I got in some of my previous posts, I am giving, in the charts below, the Portfolio123 exact codes which I used for building this screen and the back-tests. The number of stocks left after each demand can also be seen in the chart.


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One year back-test


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Five years back-test


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Fourteen years back-test


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Summary

The dividend growth screen has given much better returns during the last year, the last five years and the last 14 years than the S&P 500 and the Russell 3000 benchmarks. The Sharpe ratio, which measures the ratio of reward to risk, was also much better in all the three tests. Furthermore, the maximum drawdown, which normally is much bigger in a small portfolio than in the benchmarks, was much smaller in all the three tests.

One-year return of the screen was high at 30.45%, while the return of the S&P 500 index during the same period was at 15.16% and that of the Russell 3000 index was at 16.68%.

The difference between the dividend growth screen to the benchmarks was even more noticeable in the 14 years back-test. The 14-year average annual return of the screen was at 17.54%, while the average annual return of the S&P 500 index during the same period was only 2.05% and that of the Russell 3000 index was at 2.76%. The maximum drawdown of the screen was only 42.74%, while that of the S&P 500 was at 56.39% and the maximum drawdown of the Russell 3000 index was at 57.07%.

Although this screening system has given superior results, I recommend readers use this list of stocks as a basis for further research.

Source: A Good-Yielding Dividend Growth Portfolio With Very Low Risk