- Ranking the top twenty S&P MidCap 400 dividend stocks according to investing principles of the well-known investor William O'Neil.
- Explanation and back-testing of the "All-Stars: O'Neil" ranking system.
- Description and a buy recommendation for the first ranked stock of the system Waddell & Reed Financial.
In my previous article, I ranked the best large-cap dividend stocks according to O'Neil principles, and I focused on the first stock of the list, Honeywell International Inc. (NYSE:HON). In this article, I ranked the best mid-cap dividend stocks according to O'Neil principles, and I focused on the first stock of the list Waddell & Reed Financial, Inc. (NYSE:WDR).
A Ranking system sorts stocks from best to worst based on a set of weighted factors. Portfolio123 has a powerful ranking system which allows the user to create complex formulas according to many different criteria. They also have highly useful groups of pre-built ranking systems. I used one of them, the "All-Stars: O'Neil", in this article. The ranking system is based on investing principles of the well-known investor William O'Neil.
The "All-Stars: O'Neil" ranking system is quite complex, and it is taking into account many factors like; EPS Growth, Sales Growth, Industry Growth, Market conditions and Margins, as shown in the Portfolio123's chart below.
In order to find out how such a ranking formula would have performed during the last 15 years, I ran a back-test, which is available by the Portfolio123's screener. For the back-test, I took all the 7,014 stocks in the Portfolio123's database.
The back-test results are shown in the chart below. For the back-test, I divided the 7,014 companies into fifty groups according to their ranking. The chart clearly shows that the average annual return has a very significant positive correlation to the "All-Stars: O'Neil" rank. This brings me to the conclusion that the ranking system is useful.
After running the "All-Stars: O'Neil" ranking system on the companies which are included in the S&P MidCap 400 index and pay a dividend with a higher than 1% yield, on March 21, I discovered the twenty best dividend stocks, which are shown in the table below.
Waddell & Reed Financial, Inc.
Waddell & Reed Financial, Inc., through its subsidiaries, provides investment management, investment product underwriting and distribution, and shareholder services administration to mutual funds, and institutional and separately managed accounts in the United States. Waddell & Reed Financial, Inc. was founded in 1937 and is based in Overland Park, Kansas.
The table below presents the valuation metrics of WDR, the data were taken from Yahoo Finance and finviz.com.
WDR's valuation metrics are quite good; the company has a low debt, and the enterprise value-to-EBITDA ratio is at 13.62. According to Yahoo Finance, WDR's next financial year forward P/E is at 17.0 and the average annual earnings growth estimates for the next five years is very high at 17.8%. These give a very low PEG ratio of 0.96. The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A PEG value of less than one means that the stock is undervalued.
Latest Quarter Results
On February 4, Waddell & Reed reported its fourth-quarter 2013 financial results, which beat EPS expectations by $0.09 (10.80%) and beat on revenues. The company reported fourth quarter net income of $78.8 million, or $0.92 per diluted share, compared to net income of $68.4 million, or $0.80 per diluted share during the previous quarter and net income from continuing operations of $52.4 million, or $0.61 per diluted share during the fourth quarter of 2012.
In the report, Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed said:
Fourth quarter and full year results marked a number of new records for our firm. Net income, earnings per diluted share, operating revenues and operating income set new highs in 2013. Sales and advisor productivity were at record levels while net flows were the second highest level ever. Such successes are a testament to our people, our business model, the strength and effectiveness of our distribution network, and a significant suite of products with strong performance records.
Next Quarter Results
Waddell & Reed will report its first-quarter 2014 financial results on April 21. WDR is expected to post a profit of $0.84 a share, a 33.3% rise from the company's actual earnings for the same quarter a year ago. Since the company has shown earnings surprise in three of the last four quarters, I think that there is a reasonable chance that WDR will beat analyst expectations also in the current quarter.
Waddell & Reed has been paying uninterrupted dividends since 1989. The forward annual dividend yield is at 1.84% and the payout ratio only 39.9%. The annual rate of dividend growth over the past three years was high at 15.3%, over the past five years was at 9.2%, and over the past ten years was at 7.5%. 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 WDR's performance has been very good in this respect.
Since the company generates lots of cash, has a low debt and the payout ratio is low, there is an excellent chance that the company will continue to raise its dividend payment.
WDR's dividend is paid every quarter, as shown in the charts below.
Competitors and Group Comparison
A comparison of key fundamental data between Waddell & Reed and its main competitors is shown in the table below.
Source: Yahoo Finance
WDR's valuation metrics are better than those of its main competitors. WDR has the strongest earnings growth prospects, and by far the lowest PEG ratio among the group.
WDR's growth rates and return on capital parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the tables below.
Personally I am using only fundamental analysis for my investment decisions. After many years of experience, and after having tried all kinds of decisions making including technical analysis, I have reached the conclusion that relying on fundamental information is giving me the highest return. Nevertheless, some investors are successfully using technical analysis to find the proper moment to start an investment (I am not talking about traders; my analysis is only for investors). The charts below give some technical analysis information.
The WDR stock price is 4.60% above its 20-day simple moving average, 8.12% above its 50-day simple moving average and 27.92% above its 200-day simple moving average. That indicates a strong short-term, mid-term and long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.09 and ascending which is a strong bullish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 73.58 which indicate overbought conditions.
Analysts' opinion is divided. Among the eleven analysts covering the stock, two rate it as a strong buy, one rates it as a buy and eight analysts rate it as a hold.
On February 05, 2014, Citigroup analyst William Katz upgraded the WDR stock from neutral to buy. I consider Mr. Katz's analysis valuable, since he has 4-Star rating from Tip Ranks for the accuracy of his previous calls.
The year of 2013 was remarkably successful for Waddell & Reed. The company achieved net flows of $8,509 million, this compared to $2,340 million net flows in 2012 and $5,029 in 2011. Furthermore, Q4 2013 net flows of $2.8 billion represent an organic growth rate of 19%, significantly outpacing industry trends. According to the company, the advisors channel remains a model of asset stability, maintaining an industry-low redemption rate and growing sales and productivity. These characteristics provide steady and predictable sources of cash flow.
Waddell & Reed is accelerating cash returns to shareholders through buybacks and dividends. In the fourth quarter the company repurchased 304 million shares for $19.6 million. In 2013, the company bought back nearly 1.5 billion shares worth $72.1 million. Overall, Waddell & Reed returned $168.2 million to shareholders in the form of dividends and share repurchases in 2013.
Although WDR stock has risen 111.9% since the beginning of 2013, it is still an excellent buy right now. This is compared to the 31.3% rise of the S&P 500 index and the 43.0% rise of the Nasdaq Composite Index during the same period.
According to Waddell & Reed, mutual fund investors may redeem their investments in its mutual funds at any time without any prior notice. Additionally, its investment management agreements with institutions and other non-mutual fund accounts are generally terminable upon relatively short notice. Investors can terminate their relationship with WDR, reduce their aggregate amount of assets under management, or shift their funds to other types of accounts with different rate structures for any number of reasons, including investment performance, changes in prevailing interest rates and financial market performance. The decrease in revenues that could result from any such event could have a material adverse effect on the company's business and earnings.
Waddell & Reed succeeded to achieve strong net flows during 2013 and especially in the fourth quarter where net flows of $2.8 billion represented an organic growth rate of 19%, significantly outpacing industry trends. The company has compelling valuation metrics and it has a low debt. The company has recorded very strong EPS growth, and it has strong earnings growth prospects, its PEG ratio is very low at 0.96, much lower than its competitors. Furthermore, according to Portfolio123, its two-year Sharpe ratio, which measures the ratio of reward to risk, is very high at 2.180, much better than the industry median of 0.886 and S&P 500 median of 0.975.
All these factors lead me to the conclusion that WDR stock has still plenty of room to move up. Furthermore, the rich growing dividend represents a gratifying income.