On Wall Street value investors can sometimes become even more fickle than fashionistas during Fashion Week in New York City. What's hot in the market today could be out of favor tomorrow.
Now most investors' gets a headache when a dividend stock they own goes out of "vogue" with the investment community; but that's what I love about the market. In that the "beauty" of a stock lies in the eyes of the beholder.
After all, just because a dividend stock becomes temporarily out of favor and decreases in value doesn't mean the company is actually performing poorly.
This reality brings up an overlooked yet crucial question when it comes to investing successfully over the long-term:
How can an investor discern whether a dividend stock with bearish momentum still has long-term value to the upside?
While there's more than one way to skin a cat, I believe there are three simple steps that any investor can take to help find this answer as I'll discuss below.
3 Quick Ways To Skin Dividend Stocks:
1. Focus on the current dividend yield that the stock offers.
2. Spot-check the company's financial liquidity for red flags.
3. Look at Earning Per Share growth (Q/Q).
With this an investor can get a quick snapshot of how much he'll be compensated by holding the position via dividends, the company's financial health, and how well it's capitalizing on its top line numbers relative to bottom line profitability.
In my view, with these three points any investor can quickly get an idea whether it's worth spending time on doing more in-depth analysis or not.
What's In It For Me?
Today many people still don't understand why VC and private equity investors make so much money but here is why in a nutshell:
VC and private equity investors take on a good deal of risk with every investment they make. Therefore, their returns need to be high to help manage the level of risk they're taking regularly.
In my opinion, investing in dividend stocks with bearish momentum shouldn't be viewed any differently.
Based off the current dividend yield any investor can instantly get a clear picture of the perceived risk-to-reward ratio. In that, as the risk to invest in a dividend stock increases, generally, so does its dividend yield to compensate for that reality.
A perfect example of this deals with IBM (NYSE:IBM) in 2008 and early 2009. This was a point when many investors thought financial markets were going to completely collapse. As a result IBM took on extreme bearish momentum and for a brief period it offered a 5% dividend yield. This 5% yield was in direct correlation to the risk that the market perceived with owning IBM at the time.
That would've been a great dividend yield to lock-in because today IBM's dividend yield is only a little over 2%.
The take away is that if value investors want to pick up dividend stocks with bearish momentum they should first focus on being compensated, via dividends, for the risk they're incurring. In my opinion, that means getting a dividend yield of at least 3%.
Show Me The Money:
An easy way to see if a dividend-paying company may have liquidity issues in the future deals with reviewing their current ratio:
Two simple reasons:
1. If the current ratio is less than one this means that should the company's short-term obligations come due all at once it wouldn't be able to pay them all off with its current asset base.
A company that can't easily cover its short-term obligations is a red flag. In my opinion, it also implies that perhaps investors should stay away till this situation changes.
2. If a company can't cover all its short-term obligations this implies, in my opinion, that future dividends are at risk. After all, the company could be forced to suspend future dividend payments if its performance or financial situation deteriorates.
Checking the current ratio let's investors know if the bearish momentum may be stemming from weak balance sheet issues. Therefore, never forget to check the current ratio of any dividend stock before investing.
Which Direction Is This Elevator Going?
Earnings Per Share growth (Quarter-over-Quarter) is an easy way to identify whether a dividend stock with bearish momentum still has a justifiable reason to take the elevator to lower ground.
EPS growth indicates how well a company is growing the bottom line or how well it's turning itself around.
A company that can improve its bottom line growth numbers over time should see its stock price rise accordingly.
What does this mean at the end of the day?
Even if a dividend stock has bearish momentum that doesn't null the fact that it could still have improving fundamentals, which could push the stock to higher ground in the future.
Putting Principles Into Action:
Here is a short list of dividend stocks that have bearish momentum (X>=-10% in the last month), trade with a market cap of at least $300M, offer a dividend yield of 3% or higher, holds a current ratio greater than 1, and has upward Earnings Per Share Growth (Quarter-over-Quarter) of at least 5%.
The list is ranked from by market cap from highest to lowest:
1. Mattel Inc. (MAT)
Mattel Inc. designs, manufactures, and markets various toy products. Right now Mattel Inc. has a market cap of $12.07B and has declined by -17.82% over the last month.
Currently, Mattel Inc. offers a dividend yield of 4.28% and operates with a current ratio of 3.20. In addition, Mattel Inc. has seen its EPS grow (Q/Q) increase by 24.10%.
On February 14, 2014 Argus downgraded the Mattel Inc. from Buy to Hold.
2. Noble Corp. (NE)
Noble Corp. operates as an offshore drilling contractor for the oil and gas industry. Right now Noble Corp. has a market cap of $7.89B and has declined by 12.96% over the last month.
Currently, Noble Corp. offers a dividend yield of 4.81% and operates with a current ratio of 1.4. In addition, Noble Corp. has seen its EPS grow (Q/Q) by 144.40%.
On January 27, 2014 Cowen reiterated Noble Corp. an Outperform ranking and increased the price target to $49 from $44.
3. Tupperware Brands Corporation (TUP)
Tupperware Brands Corporation does X. Right now Tupperware Brands Corporation has a market cap of $4B and has declined by 13.16% over the last month.
Currently, Tupperware Brands Corporation offers a dividend yield of 3.50% and operates with a current ratio of 1.0. In addition, Tupperware Brands Corporation has seen its EPS grow (Q/Q) by 31.80%.
At this time there are no analyst updates according to Finviz.com.
4. Nordic American Tanker (NAT)
Nordic American Tanker engages in acquiring and chartering double-hull tankers. Right now Nordic American Tanker has a market cap of $627.27M and has declined by 14.18% over the last month.
Currently, Nordic American Tanker offers a dividend yield of 4.72% and operates with a current ratio of 5.50. In addition, Nordic American Tanker has seen its EPS grow (Q/Q) by 34.10%.
On January 09, 2014 Maxim initiated a rating of Sell on Nordic American Tanker with a price target of $6.
I hope this article help dividend investors as they do their own due diligence on dividend stocks with bearish momentum but who have improving profitability and offer a solid dividend yield.
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.
Additional disclosure: This is not to be construed as direct or indirect investment advice. Investors should always do their own independent due diligence before making any investment decisions.