In the first round of the Dividend Portfolio playoffs we have #10 seeded Wells Fargo & Co (WFC) taking on #7 seeded E I Du Pont De Nemours and Co (DD). Wells Fargo is a bank holding company which operates in three segments: Community Banking, Wholesale Banking and Wealth, Brokerage and Retirement. DuPont is a diversified technology company operating in the segments of Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Coatings, Performance Materials, Safety & Protection, and Pharmaceuticals.
The following table depicts the recent earnings reports for each company:
($ in billions)
($ in billions)
Wells Fargo is up 33.88% excluding dividends in the past year (up 36.06% including dividends) while DuPont is up 45.31% excluding dividends (up 47.78% including dividends), and are beating the S&P 500, which has gained 31.8% in the same time frame. This matchup will be played out in a best of seven game series based on the metrics below. For a complete list of all the metrics utilized in the seven game series click here. Not all the metrics will be looked at if a team can win and win early. This wild-card matchup will determine the winner which will go on to play against Hasbro, Inc. (HAS) in the next round of the playoffs for the Dividend Growth Portfolio Super Bowl.
Forward P/E is the metric of how many times future earnings you are paying up for a particular stock. The earnings portion of the ratio I utilize is the earnings value for the next twelve months or for the next full fiscal year. I like utilizing the forward P/E ratio as opposed to the trailing twelve month P/E ratio because it is an indication of where the stock is going to go in the future. I like to get a glimpse of the future, but will take note of where it was coming from in the past. Wells Fargo carries a 1-year forward-looking P/E ratio of 11.33 which is inexpensively priced for the future right now while DuPont's 1-year forward-looking P/E ratio of 15.06 is currently fairly priced. Game 1 goes to Wells Fargo.
This metric is the trailing twelve month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five year estimated growth rate, however I like to use the one year growth rate. This is because as a capital projects manager that performs strategy planning for the research and development division of a large-cap biotech company I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year things can change dramatically. I put much more faith in a one year forecast as opposed to a five year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone. The 1-year PEG ratio for Wells Fargo is currently at 3.32 based on a 1-yr earnings growth of 3.59% while DuPont's 1-yr PEG ratio stands at 1.84 with a 1-yr growth rate of 12.26%. Both PEG values are fairly priced in terms of growth but with this win DuPont evens the series at a game apiece.
EPS Growth Next Year
This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one year earnings growth projection opposed to the five year projection based on what I discussed in the PEG section above. Wells Fargo has a projected EPS growth rate of 3.59% while DuPont sports a growth rate of 12.26%. DuPont has now taken a 2-1 game lead in this best of seven series.
Dividend yield is a no brainer; it must be had in a dividend portfolio. The dividend yield is the amount of annual dividend paid out by a company in any given year divided by the current share price of the stock. In my dividend portfolio I don't discriminate against low yielding stocks as long as they provide excellent fundamental metrics in the form of the forward P/E, the 1-yr PEG and the 1-yr EPS growth rate. Dividends are a way to measure how much cash flow you're getting for each dollar invested in the stock. Obviously, the higher the yield, the better, as long as it is covered by the trailing twelve month earnings. Wells Fargo pays a dividend of 2.64% with a payout ratio of 32% of trailing 12-month earnings while DuPont pays a dividend of 2.77% with a payout ratio of 63% of trailing 12-month earnings. DuPont takes a three to one series lead in this match and can advance to the next round with just one more victory.
Return on Assets
Return on assets is the metric which shows how profitable a company is relative to its total assets, telling us how efficient a management team is at using its assets to generate earnings. It is best to compare ROA values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. The assets of a company are comprised of both debt and equity. The higher the ROA value, the better, because the company is earning more money on less investment. Wells Fargo is only showing a 1.4% efficiency rate on their assets while DuPont is showing 9.4% efficiency. With this victory DuPont wins the series against Wells Fargo four to one.
Although DuPont won the series against underdog Wells Fargo, Wells Fargo is still a great company with excellent backing from the Oracle of Omaha. Because I am a value dividend investor the first three matches carried the most importance because they were fundamental metrics and DuPont appeared to be the better valuation stock because it has the greater growth potential. In my opinion the banks still have not participated in this rally and I believe 2014 will be a strong year especially for Wells Fargo, but DuPont is poised for great earnings growth as it continues to get rid of its slower performing assets. After beating Wells Fargo, DuPont will advance to the next round of the playoffs and go head to head against the #2 seeded Hasbro.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!