In the final match of the Dividend Portfolio Super Bowl we have #9 seeded JPMorgan Chase & Co. (NYSE:JPM) 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. JP Morgan is a financial holding company and is engaged in investment banking, financial services for consumers and small business, commercial banking, financial transaction processing, asset management and private equity.
The following table depicts the recent earnings reports for each company:
($ in billions)
($ in billions)
JPMorgan is up 16.82% excluding dividends in the past year (up 18.89% including dividends) while KLAC is up 9.51% excluding dividends (up 12.42% including dividends), and the S&P 500 has gained 18.53% 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. Both these teams have gone through three rounds of playoffs and haven't lost a match on their way here. Right out of the gate someone is going to be upset with their first loss of the playoffs, but not necessarily lose the Super Bowl. This matchup will determine the winner of the Dividend Portfolio Super Bowl and will be automatically seeded as the #1 seed at next year's playoffs.
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. JPMorgan carries a 1-year forward-looking P/E ratio of 8.69 which is inexpensively priced for the future right now while KLAC's 1-year forward-looking P/E ratio of 13.10 is also inexpensively priced. Game 1 goes to JPMorgan and KLAC suffers its first loss of the playoffs.
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 JPMorgan is currently at 2.12 based on a 1-yr earnings growth of 5.96% while KLAC's 1-yr PEG ratio is 0.79 based on a 1-yr earnings growth rate of 23.95%. KLAC takes Game Two to even the series and returns the favor giving JPMorgan its first loss of the playoffs.
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. JPMorgan has a projected EPS growth rate of 5.96% while KLAC sports a growth rate of 23.95%. KLAC puts a knockout punch to JPMorgan in Game Three.
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. JPMorgan pays a dividend of 2.76% with a payout ratio of 35% of trailing 12-month earnings while KLAC pays a dividend of 2.92% with a payout ratio of 55% of trailing 12-month earnings. KLAC wins Game Four of the series and is within a game of winning the first ever Dividend Portfolio Super Bowl.
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. JPMorgan is showing a 1.4% efficiency rate on their assets while KLAC is only showing 10.4% efficiency. With this victory KLAC is the very first Dividend Portfolio Champion!
Although KLAC beat Dupont in the series, JPMorgan 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 JPMorgan, KLAC is the very first Dividend Portfolio Champion and is guaranteed not to be rotated out during any quarterly adjustment (barring anything catastrophic) while claiming the #1 seed for next year's Dividend Portfolio Super Bowl. If you're keeping track at home (or you can just look at the brackets below), KLAC advanced from the wild-card round and only lost one match for a 16-1 record with very solid fundamental and financial metrics.
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!