Building A Winning Stocks Portfolio Based On Dividend And Earnings Growth

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 |  Includes: BLX, IPHS, LEG
by: Arie Goren

In order to create a dividend stock portfolio that can outperform the market by a big margin, I have used the following screen. It is based on attempt to search for profitable companies with dividend yield and dividend growth rates greater than their industry averages. Those companies would also have to show strong earnings growth prospects, and their last five years earnings growth should be greater than their industries' earnings growth.

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

  1. The stock does not trade over-the-counter (OTC).
  2. Market cap is greater than $100 million.
  3. Price is greater than 1.00
  4. Dividend yield is greater than the dividend yield of the industry.
  5. The payout ratio is less than 100%.
  6. The annual rate of dividend growth over the past five years is greater than the dividend growth of the industry.
  7. Average annual earnings growth estimates for the next 5 years is greater than 10%.
  8. Average annual earnings growth for the past 5 years is greater than the average annual earnings growth of the industry.
  9. The twenty stocks with the highest yield 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 Yahoo Finance, Portfolio123 and finviz.com.

After running this screen on November 29, 2013, before the market open, I discovered the twenty stocks which are shown in the table below. In this article, I describe the three stocks with the highest dividend yield among the twenty stocks.

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The table below presents the dividend yield, the average dividend yield of the industry, the payout ratio and the PEG ratio, for the twenty companies.

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Banco Latinoamericano de Comercio Exterior, S.A (NYSE:BLX)

Banco Latinoamericano de Comercio Exterior, S.A. provides trade finance services to corporations, sovereign, middle-market companies, and banking and financial institutions in Latin America and the Caribbean. The bank was founded in 1977 and is headquartered in Panama, the Republic of Panama.

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Source: company presentation

Banco Latinoamericano has a very low trailing P/E of 12.15 and even a lower forward P/E of 9.47. The price-to-cash ratio is extremely low at 1.15, and the average annual earnings growth estimates for the next five years is at 6.98%. The forward annual dividend yield is high at 4.49%, and the payout ratio is at 53.4%. The annual rate of dividend growth over the past three years was very high at 25.90% and over the past five years was at 6.37%.

The BLX stock price is 1.60% above its 20-day simple moving average, 4.33% above its 50-day simple moving average and 11.44% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.

Analysts recommend the stock. Among the three analysts covering the stock, one rates it as a strong buy, and two rate it as a buy.

Banco Latinoamericano has recorded strong revenue, EPS and dividend growth, during the last three years, as shown in the charts below.

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Source: company presentation

Most Banco Latinoamericano's stock valuation parameters have been better than its industry median, sector median and the S&P 500 median, as shown in the tables below.

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Source: Portfolio123

On October 16, Banco Latinoamericano reported its third-quarter financial results, which missed EPS expectations by $0.04. The Bank's third quarter 2013 Net Income reached $22.8 million, or $0.59 per share, compared to $21.7 million, or $0.57 per share, in the previous quarter, and $13.0 million, or $0.34 per share in the third quarter 2012, as improved performance from core activities, mainly higher net interest income from average portfolio growth, higher fee income, and lower operating expenses, was partially offset by losses from holdings in the investments funds.

Banco Latinoamericano has compelling valuation metrics and good earnings growth prospects, and considering the fact that the stock is in an uptrend, BLX stock can move higher. Furthermore, the very rich dividend represents a gratifying income.

BLX Dividend Chart

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Chart: finviz.com

Leggett & Platt, Incorporated (NYSE:LEG)

Leggett & Platt, Incorporated designs and produces various engineered components and products worldwide.

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Source: company presentation

Leggett & Platt has a trailing P/E of 17.19 and a forward P/E of 17.55. The price to free cash flow for the trailing 12 months is at 21.22, and the average annual earnings growth estimates for the next five years is high at 15%. The forward annual dividend yield is quite high at 3.99%, and the payout ratio is at 63.8%. The annual rate of dividend growth over the past three years was at 3.68% and over the past five years was at 3.71%.

The LEG stock price is 1.29% above its 20-day simple moving average, and 0.87% above its 50-day simple moving average. That indicates a short-term, and a mid-term uptrend.

Leggett & Platt has recorded strong EPS growth, during the last year, the last three years and the last five years, but the revenue growth during the last five years was negative, as shown in the charts below.

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Source: company presentation

On October 23, Leggett & Platt reported its third-quarter financial results, which missed EPS expectations by $0.01.

Third-Quarter 2013 Highlights

  • 3Q EPS was $0.49, including an unusual $0.06 benefit from an acquisition completed during the quarter
  • 3Q sales were $958 million, 2% lower than in prior year
  • Revised 2013 guidance is $1.61-1.66 EPS, on sales of approximately $3.75 billion

In the report, the company commented about its dividends and stock repurchases policy:

In August, Leggett & Platt's Board of Directors increased the quarterly dividend to $.30, one cent higher than the second quarter dividend. 2013 marks 42 consecutive annual dividend increases for the company, with a compound annual growth rate of 13%. Only two other S&P 500 companies can claim as high a rate of dividend growth for as many years.

At yesterday's closing share price of $29.67, the indicated annual dividend of $1.20 per share generates a yield of 4.0%, one of the highest dividend yields among the S&P 500 Dividend Aristocrats.

During the third quarter the company purchased 1.1 million shares of its stock, and issued 0.3 million shares. The number of shares outstanding decreased to 141.2 million. During the first three quarters of 2013 the company repurchased 3.9 million shares and issued 3.1 million shares. Approximately two-thirds of the stock issuance reflects employee stock option exercises in response to higher stock prices.

In the report, the company also gave an outlook for the full year:

For 2013, Leggett & Platt now anticipates annual sales of approximately $3.75 billion, reflecting 1% growth; prior sales guidance was $3.75-3.85 billion. Full year EPS guidance is now $1.61-1.66. Continuing operations EPS guidance, adjusted to exclude the $.06 benefit from the 3Q acquisition, has been narrowed to $1.50-1.55, versus prior guidance of $1.50-1.65. Last year's continuing operations adjusted EPS was $1.47.

Although LEG reduced somehow its outlook for the full year, considering its historical strong EPS growth, and its strong earnings growth prospects, an investor in LEG stock can expect a capital gain along the very rich dividend.

Risks to the expected capital gain and to the high dividend payment include; a downturn in the U.S. economy, and the company's debt of $959 million.

LEG Dividend Chart

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Chart: finviz.com

Innophos Holdings Inc (NASDAQ:IPHS)

Innophos Holdings, Inc., through its subsidiaries, engages in the production of mineral based specialty ingredients for food, beverage, dietary supplements, pharmaceutical, oral care, and industrial end markets.

Innophos Holdings has a low debt (total debt to equity is only 0.35), and it has a trailing P/E of 21.88 and a low forward P/E of 13.70. The current ratio is high at 4.80, and the average annual earnings growth estimates for the next five years is quite high at 11%. The forward annual dividend yield is quite high at 3.37%, and the payout ratio is at 63.4%. The annual rate of dividend growth over the past three years was very high at 26.37% and over the past five years was also high at 15.24%.

Innophos Holdings has recorded strong revenue, EPS and dividend growth, during the last three years and the last five years, as shown in the charts below.

On October 28, Innophos Holdings reported its third-quarter financial results.

Third-Quarter 2013 Highlights

  • Net sales for the third quarter 2013 rose 4% to $220 million or $9 million above third quarter 2012 levels. Specialty Phosphates grew $13 million, up 7% year-over-year, partially offset by GTSP & Other which declined by $4 million.
  • US/Canada Specialty Phosphates sales of $153 million were up 6% year-over-year on 2% volume growth in the core business combined with a 5% benefit from acquisitions; average selling prices declined 1% due to unfavorable mix.
  • Mexico Specialty Phosphates sales of $45 million improved 3% sequentially and 9% compared to the year ago period on improved operations.
  • GTSP & Other sales of $22 million for the third quarter 2013 were $4 million below the year ago level due to declining fertilizer market prices that ended 15-20% below where the quarter began.
  • Diluted EPS for the third quarter 2013 was $0.49 compared to $0.74 for the third quarter 2012. The decline in EPS was due to an increased operating loss in GTSP & Other ($0.10 per share after tax), higher planned maintenance outage expenses in Mexico ($0.09 per share after tax) and unfavorable currency translation expense ($0.08 per share after tax) when comparing the current quarter against the prior year quarter. Third quarter 2013 EPS also included $0.07 per share of provisions for uncertain tax positions; adjusting for this expense, diluted EPS for the third quarter 2013 would have been $0.56 compared to $0.74 for the third quarter 2012.

Innophos Holdings has recorded strong revenue, EPS and dividend growth, and considering its cheap valuation metrics and its good earnings growth prospects, IPHS stock can move higher. Furthermore, the rich dividend represents a nice income.

IPHS Dividend Chart

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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 15 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 benchmark (S&P 500), 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. I am also giving a table which readers can use to copy and paste codes directly into the Portfolio123's screener.

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Universe(NOOTC)=TRUE

MktCap > 100

Close(0)> 1

Yield >YieldInd

Between(PayRatioTTM,1,100)

Div5YCGr%>Div5YCGr%Ind

LTGrthMean>10

EPS5YCGr%>EPS5YCGr%Ind

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One year back-test

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Five years back-test

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Fifteen 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 fifteen years than the S&P 500 benchmark. The Sharpe ratio, which measures the ratio of reward to risk, was also much better in all the three tests.

One-year return of the screen was very high at 42.52%, while the return of the S&P 500 index during the same period was at 29.13%.

The difference between the low risk dividend screen to the benchmark was even more noticeable in the 15 years back-test. The 15-year average annual return of the screen was at 13.13%, while the average annual return of the S&P 500 index during the same period was only 2.62%. The maximum drawdown of the screen was at 57.03%, while that of the S&P 500 was at 57%.

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

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.