- A Portfolio of twenty S&P 500 dividend growth companies that has outperformed the market by a big margin during the last 15 years.
- The 15-year average annual return of the portfolio was very high at 13.63%, while the return of the S&P 500 index during the same period was only 2.83%.
- The good-yielding portfolio has a lower risk than the S&P 500 index.
- Description and a buy recommendation for the first stock in the screen ACE Limited.
I tried to create a good-yielding large-cap stock portfolio that can outperform the market by a big margin, but at the same time, would have a very low risk. The following screen shows such a promise. I have searched for highly profitable companies that pay rich dividends with a very low payout ratio. Those stocks also would have to show a very low debt.
The screen's method that I use to build this portfolio requires all stocks to comply with all following demands:
- The stock does not trade over-the-counter (OTC).
- Price is greater than 1.00.
- Market cap is greater than $100 million.
- Average daily total amount traded for the past 10 days is greater than $500,000.
- Dividend yield is greater than 2.5%.
- The payout ratio is less than 100%.
- Last dividend declared is greater than the last dividend paid.
- Total debt to equity is less than 1.00.
- The twenty stocks with the lowest payout ratio among all the stocks that complied with the first eight demands.
I used the Portfolio123's powerful screener to perform the search and to run back-tests. Nonetheless, the screening method should only serve as a basis for further research. All the data for this article were taken from Yahoo Finance, Portfolio123 and finviz.com.
After running this screen on March 07, 2014, before the market open, I discovered the twenty best stocks, which are shown in the charts below. In this article, I describe the first stock in the list ACE Limited (NYSE:ACE).
The table below presents the dividend yield, the payout ratio, the forward P/E and the total debt to equity for the twenty companies.
ACE Limited provides commercial insurance and reinsurance for a diverse group of international clients, and also provides funds to support underwriting capacity for Lloyd's syndicates managed by Lloyd's managing agencies. The company was founded in 1985 and is headquartered in Zurich, Switzerland.
Latest Quarter Results
On January 28, ACE Limited reported its fourth-quarter and full year 2013 financial results, which beat EPS expectations by $0.38 (18.90%). The company reported net income for the quarter ended December 31, 2013, of $2.90 per share, compared with $2.22 per share for the same quarter last year. Book value and tangible book value per share increased 2.2% and 3.0%, respectively, from September 30, 2013. Book value and tangible book value per share now stand at $84.83 and $68.93, respectively. Operating return on equity for the quarter was 12.1%. The property and casualty combined ratio for the quarter was 89.3%.
In the report, Evan G. Greenberg, Chairman and Chief Executive Officer of ACE Limited, commented:
ACE had an excellent fourth quarter and a record year. Both our quarterly and annual results were driven by very strong premium revenue growth globally and an exceptional underwriting performance. Put simply, we are growing while achieving good margins - it's about growth in areas where prices are attractive and securing improved terms including rate in areas where they're not.
ACE Limited has been paying uninterrupted dividends since 1993. The forward annual dividend yield is at 2.60%, and the payout ratio is only 14%. The annual rate of dividend growth over the past three years was high at 17.55% and over the past five years was also quite high at 14.39%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and ACE's performance has been good in this respect.
On February 27, The Board of Directors of ACE Limited announced that it will recommend to shareholders at the company's 2014 Annual General Meeting a 3% increase in its quarterly dividend. The proposal calls for a $2.60 annual dividend, payable in four installments of $0.65 per quarter, compared to the current quarterly dividend amount of $0.63.
Analyst opinion is divided, but most analysts recommend the stock. Among the twenty six analysts covering the stock, five rate it as a strong buy, thirteen rate it as a buy and eight rate it as a hold.
The year of 2013 had been remarkably successful for the company, and ACE has done an excellent job maintaining investment income. Of course, like the rest of the industry, ACE benefited from light catastrophe losses during the year. Complementing the excellent underwriting results and a product of its strong cash flow was net investment income of $2.1 billion, which was down less than 2% for the year - a good result given the low interest rate environment. ACE's decision to refrain from buying back its own shares has kept its principal at record levels, in contrast to some of its competitors that have seen their portfolios becoming much smaller due to massive share repurchases program. ACE's record earnings produced a strong operating ROE of over 12% while per share book value grew 5% for the year, or 11% if you exclude the unrealized losses from its investment portfolio as interest rates rose.
Now let's look at the numbers, ACE has recorded strong EPS growth during the last five years. The average annual EPS growth for the past five years was very high at 25.84%; the EPS growth was especially strong in 2012 at 74.6% over the previous year and in 2013 at 38.4% EPS growth over 2012. ACE's trailing P/E of 9.58 and its forward P/E of 10.79 are very low, and its price-to-free-cash-flow ratio is also very low at 11.04. The average annual earnings growth estimates for the next 5 years is at 7.37%, and the enterprise value-to-EBITDA ratio is remarkably low at 8.48.
ACE has substantial exposure to losses resulting from natural disasters, man-made catastrophes, and other catastrophic events. Catastrophes can be caused by various events, including hurricanes, typhoons, earthquakes, hailstorms, drought, explosions, severe winter weather, fires, war, acts of terrorism, nuclear accidents, political instability, and other natural or man-made disasters. As a result, the occurrence of one or more catastrophic events could have an adverse effect on the company results of operations or financial condition.
ACE has compelling valuation metrics and good earnings growth prospects. The company is generating strong cash flows; its price-to-free-cash-flow ratio is only 11.04, and it has a low debt; total debt to equity is only 0.21. ACE has done an excellent job maintaining investment income despite the low interest rate environment. In my opinion, ACE's stock is still cheap, it has risen only 23.0% since the beginning of 2013; this compared to 31.6% rise of the S&P 500 index and 44.1% rise of the Nasdaq Composite Index at the same period.
All these factors lead me to the conclusion that ACE stock has plenty of room to go up. Furthermore, the rich growing dividend represents a gratifying income.
In order to find out how such a screening formula would have performed during the last year, last 5 years and last 15 years, I ran the back-tests, which are available by the Portfolio123's screener.
The back-test takes into account running the screen every four weeks and replacing the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. The theoretical return is calculated in comparison to the benchmark (S&P 500), considering 0.25% slippage for each trade and 1.5% annual carry cost (broker cost). The back-tests results are shown in the charts and the tables below.
One year back-test
Five years back-test
Fifteen years back-test
The good-yielding large-cap screen has given much better returns during the last year, the last five years and the last fifteen years than the S&P 500 benchmark. The Sharpe ratio, which measures the ratio of reward to risk, was also much better in all the three tests. Furthermore, the maximum drawdown, which normally is much bigger in a small portfolio than in the benchmarks, was smaller in the one year and the fifteen year tests.
One-year return of the screen was very high at 31%, while the return of the S&P 500 index during the same period was at 21.79%.
The difference between the good-yielding screen to the benchmark was even more noticeable in the 15 years back-test. The 15-year average annual return of the screen was at 13.63%, while the average annual return of the S&P 500 index during the same period was only 2.83%. The maximum drawdown of the screen was at 50.34%, while that of the S&P 500 was at 57%.
Although this screening system has given superior results, I recommend readers use this list of stocks as a basis for further research.