The past few weeks have been interesting for investors as the question regarding the latest market decline was whether it was merely a pullback or the long anticipated correction. All of the recent volatility and earning reports has had an impact on the Piotroski F-Score Dividend Portfolio. It is time to provide an update on the portfolio in this the fourth installment. To understand how this portfolio came to be, you can read the first article here.
F-SCORE DIVIDEND PORTFOLIO
Let's quickly review what the Piotroski F-Score is. Piotroski started by selecting the top 20% of book-to-market or lowest price-to-book stocks. The nine variables that constitute the F-Score evaluate the financial strength of a stock by using simple accounting based variables. Here are the nine variables used to calculate the F-Score. Each variable gets scored a one (1) if the condition is met.
- Positive (+) net income in the current year.
- Positive (+) cash flow from operations in the current year.
- Return on Assets [ROA] is higher in the current period compared to the previous year.
- Cash flow from operations exceeds net income before extraordinary items.
- Lower ratio of long-term debt to assets in the current period compared to the previous year.
- Higher current ratio this year compared to the previous year.
- Company did not issue new shares/equity in the preceding year.
- Higher gross margin compared to the previous year.
- Higher asset turnover ratio year on year.
Piotroski only selected stocks that scored 7 or above (maximum of 9). Now this is a dividend-focused portfolio. Therefore, I added some additional criteria to help screen the stocks for this portfolio.
- Minimum dividend yield of 1.9%
- F-Score between 8 and 9
- Minimum of one (1) year in paying a dividend
- Must be included in the CCC lists prepared by David Fish, otherwise, have increased the dividend annually for as long as the company has paid a dividend (essentially, the company has not frozen or cut their dividend)
Table 1 presents the F-Score Dividend Portfolio as it stands.
AirBoss of America
Progressive Waste Solutions Ltd
Bemis Co Inc.
Emerson Electric Co.
Frisch's Restaurants, Inc.
Johnson & Johnson
NV Energy Inc
Oil Dri Corporation of America
J.M. Smucker Co.
Orchids Paper Products Company
Union Pacific Corp.
Bonterra Energy Corp
Atlantic Tele-Network, Inc.
Realty Income Corporation
Omega Healthcare Investors
Procter & Gamble Co.
Sunoco Logistics Partners
*Market Price is the price as of the close of 2014-02-07. Figures in brackets in the Price Difference column represent negative values or losses.
The portfolio is currently sitting at a market value loss of $2,559.88 or -1.92%. This was also a poor month for dividends as only O, OHI, WSM and PG went ex-dividend in January. A total of $151.02 in dividends is the expected total to be paid out.
Overall, almost every company included in the portfolio is in the red with the exception of UNP (which has done very well), FRS, HCP, ATNI and SXL. The entry point for UNP appears to have been one of the best in the portfolio. Given the pullback we just experienced, the stock is still up 15.79% from our entry point.
One thing I have noticed over the course of this experiment is that when these stocks have an F-Score of 8 or 9, they do tend to be fairly valued or overvalued (example JNJ, PSA, SJR). For an income investor, this may not be the right time to purchase as they will be looking for the stock to have better valuations. Furthermore, I have noticed that in some cases such as ABSSF, the purchase price has been a level of support. Given UNP excellent entry point, it is obvious that merely considering the F-Score as the sole criteria for initiating a position in a stock is not necessarily in the best interest of the investor. Other fundamentals should be considered.
There would have been some changes made to the portfolio this time around as NVE was recently delisted; it was acquired in July 2013 and regulatory approval was given this year. PG also went from an F-Score of 7 to 5. Now, PG is a large-cap which goes against the inclusion criteria set out by Piotroski himself. However, the F-Score is a financial assessment and its basic premise is still applicable to companies of this size. Piotroski focused on unnoticed companies who would not be swayed by analyst`s expectations and estimates.
PG recent quarterly earnings were mixed. As reported on January 24th, FQ2 EPS was $1.21 which beat estimates by $0.01 however revenues of $22.28B (+0.4% Y/Y) missed estimates by $100M. This seemed like a fine quarter to me. However, other investors didn't think so and the stock dropped and the F-Score did also. Now, I am curious to figure this out.
PG had an F-Score of 7 which means that 2 out of the 9 criteria were negative. With an F-Score now at 5, it means that the company has 4 criterion that are negative. Taking the F-Score criteria I may know which points were negative:
- Net Income decreased from $4,057B in Dec 2012 to $3,248B in Dec 2013.
- The Cash Flow from Operations decreased from $3,849B in Dec 2012 to $3,299B in Dec 2013.
- The Return on Assets [ROA] percentage decreased from 11.60% in Dec 2012 to 9.60% in Dec 2013.
- Cash flow from operations did exceed net income before extraordinary items in Dec 2013.
- Long-term debt to assets was unchanged between Dec 2012 and Dec 2013.
- I could not find enough information to compare the current ratio over the last year.
- PG has been decreasing its outstanding shares from 2,919M in Dec 2012 to 2,908M in Dec 2013.
- Gross margin improved from 49.60 in 2012 to 50.00 in 2013.
- Asset turnover has been decreasing since 2011.
Based on the following chart, these issues may only be temporary. This chart from Gurufocus.com shows the quarterly F-Score for PG.
It is not the first time that PG has had an F-Score of 5; in fact it was 5 on 2012-09-28 when it reported its quarterly earnings. The company appeared to be doing great since 2012-09-28, having improved on 3 of the F-Score's criterion to reach an 8 in only two quarters. PG had been range bound between an F-Score of 6 and 8 and when the company had reached a 5 or lower, it was not long before the F-Score improved to 8 again. This could make PG a very interesting swing trade option as PG appears to have reached a low point again and may very well recover quickly. No guarantees however!
This has been an interesting learning experience regarding the F-Score. It has shown that not every stock that scores an 8 or a 9 is immediately the best time to purchase; although common logic would suggest that it could be case as such an F-Score indicates improving and growing financial indicators for the company, which usually correlates with increased stock prices. This experiment has also shown that the F-Score should not be the sole indicator for deciding when to purchase a stock (I know this is obvious but it needs to be stated). Watching a company's historical F-Score when it reaches a low point may however provide an attractive entry point.
This will be the final article on this portfolio and I hope you have enjoyed reading the progress of a unique fictional portfolio.