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Summary

  • After the recent market sell-of, I screened for a list of companies with strong fundamentals & dividend growth to make a "shopping list."
  • I looked for those companies which were trading at a discount to their historical dividend yield.
  • I also looked at the fair value of the companies I found to see which were trading at a discount to fair value.

In this article, I will be screening for dividend growth companies that I believe are mispriced, fundamentally strong, and undervalued. For my search, I will be using the Zacks.com screener to construct my initial list of mispriced and fundamentally strong companies. Below the criteria are in sections based on the reason why I included them as part of the screen. After I have my initial list, I will be doing a DCF [Discounted Cash Flow] calculation of those companies to see which are currently trading at a discount to fair value, as well as looking at dividend growth and stability.

General Criteria

Market Capitalization: >100 [Million]

PE ratio [ttm]: >1

Exchange: Not OTC

Fundamental Criteria

5-yr historical EPS Growth: >5

Long-Term Growth est.: >5

Q0 Consensus Est [last completed fiscal Qtr]: >.01

5-yr historical sales growth: >5

Mispriced Criteria

Relative price change: <1

Dividend Criteria

Dividend: >.01

5-yr Historical Dividend Growth: >10

5-yr Historical Dividend Yield: >.01

Dividend Yield: .01

Step 1: Dividend Discount

After entering the above criteria, I found there were 148 companies that met these criteria. The next step was to see out of those 148 companies, which were trading at the largest discounts to their 5-year historical dividend yield. I exported the data from the Zacks screen to an excel spreadsheet, and found and have listed in the table below, the five companies that had the largest discount to their 5-year historical dividend yield.

Symbol

Company

Dividend Discount

Current Yield

5 Yr Div. Yield %

(NYSE:MMS)

MAXIMUS INC

-42.67%

0.43%

0.75%

(NASDAQ:ARMH)

ARM HOLDNGS

-38.24%

0.42%

0.68%

(NYSE:PII)

POLARIS INDUSTRIES

-35.81%

1.47%

2.29%

(NYSE:TM)

TOYOTA MOTOR CP

-28.21%

1.12%

1.56%

(NYSE:VFC)

V F CORP

-26.61%

1.82%

2.48%


Step 2: Fair Value Estimation

The next step in my process was to take the five companies from above and to estimate the fair value of each, and to do so I will be using a DCF calculator. The data for earnings and growth for each company coming from Zacks, benchmark data from longrundata.com, CPI data from the BLS, and I will use the following assumptions in the calculator.

Earnings grow for next: 5 years

Level off: to 1% after

Benchmark return: 10 yr annualized SPY return of 6.83%+1.10% inflation= 7.93% benchmark

Symbol

Company

EPS

LT Growth

Current Price

Fair Value

Under/Over

MMS

MAXIMUS INC

1.76

19.00

42.15

53.7

Under

ARMH

ARM HOLDNGS

0.71

22.82

47.67

25.07

Over

PII

POLARIS INDUSTRIES

5.40

17.00

130.5

152.43

Under

TM

TOYOTA MOTOR CP

11.80

7.00

104.89

222.19

Under

VFC

V F CORP

2.72

11.89

57.7

62.64

Under


Out my list of five companies, ARM Holdings was the only overvalued company, so I excluded it from my final list.

Step 3: Dividend Growth & Stability

For my final step, I took the four undervalued companies from above and looked at the dividend that each company has paid since the beginning of 2007 to make sure the above four companies had not had a dividend cut during the great recession. I used data from dividendchannel.com for MMS, PII, and VFC, and I found TM dividend history on Fidelity to create a chart in Excel for each stock, which shows the annual dividend total for every year since and including 2007. The data showed and can be seen visually below, that MMS, PII, and VFC have all grown dividends since 2007, and have had no dividend cuts. However, TM had two years [2008 and 2009] where it cut the dividend, so I excluded it from my final list.

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Closing Thoughts

In closing, I believe Maximus Inc., Polaris Industries, and VF Corp are worth a deeper look, and should be considered by dividend growth investors. These companies should be considered because they are trading at a discount to their historical dividend yields, they are undervalued, and they have shown the ability to grow and maintain dividends over time.

Disclaimer

Source: 3 Mispriced Dividend Growth Stocks