In the semi-final round of the Dividend Portfolio playoffs we have #7 seeded E.I. Du Pont De Nemours And Co (NYSE:DD) taking on #6 seeded KLA-Tencor Corporation (NASDAQ:KLAC). KLAC is engaged in the design, manufacture and marketing of process control and yield management solutions for the semiconductor and related nano-electronics industries. 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)
Dupont is up 38.72% excluding dividends in the past year (up 41.19% including dividends) while KLAC is up 27.55% excluding dividends (up 29.75% including dividends), and the S&P 500 has gained 24.91% 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 matchup will determine the winner which will go on to the Super Bowl to face JPMorgan (NYSE:JPM).
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. Dupont carries a 1-year forward-looking P/E ratio of 14.84 which is inexpensively priced for the future right now while KLAC's 1-year forward-looking P/E ratio of 13.33 is also inexpensively priced. Game 1 goes to KLAC.
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 Dupont is currently at 1.82 based on a 1-yr earnings growth of 12.23% while KLAC's 1-yr PEG ratio is 0.86 based on a 1-yr earnings growth rate of 23.82%. KLAC takes Game Two away from Dupont.
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. Dupont has a projected EPS growth rate of 12.23% while KLAC sports a growth rate of 23.82%. KLAC is a game away from clinching the 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. Dupont pays a dividend of 2.81% with a payout ratio of 63% of trailing 12-month earnings while KLAC pays a dividend of 2.87% with a payout ratio of 59% of trailing 12-month earnings. KLAC sweeps the series away from Dupont.
Although KLAC beat Dupont in the series, Dupont is still a great company for a dividend portfolio. Because I am a value dividend investor, the first three matches carried the most importance because they were fundamental metrics and KLAC appeared to be the better valuation stock because it has the greater growth potential. After beating Dupont, KLAC advances to the Super Bowl to face JPMorgan. If you're keeping track at home (or you can just look at the brackets below), both JPMorgan and KLAC advanced from the wild-card round and haven't lost a single game. Something has to give, who is going to take it all? The winner of the Super Bowl will be automatically seeded as the #1 seed at next year's playoffs.
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!
Disclosure: I am long DD, JPM, KLAC. 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.