John Neff, who beat the S&P by 3% over the course of 30 years while managing the Vanguard Windsor Fund, attributed much of his success to a metric he liked to use dubbed the "total return ratio." Here is the definition:
Total Return Ratio = (analysts' expected earnings growth rate + dividend yield) / price-to-earnings ratio
What is interesting about this equation is that it takes into account both earnings growth and dividends. In this era of ultra-low bond yields, stocks that pay dividends are gaining more and more importance. That makes this metric all the more interesting.
Let's break the equation down into its constituent parts.
Dividend Yield = most recent annual dividend / current share price
Finding the analyst expected earnings growth rate isn't as hard as it sounds -- it's built into PEG which is available for most stocks at Yahoo Finance.
PEG = PE / annual EPS growth rateAnnual EPS growth rate = PE / PEG
Now that we have all the pieces, we can calculate the Total Return Ratio as follows:
Total Return Ratio = ((PE / PEG) + dividend yield) / PE
Theoretically, the higher the ratio, the better the potential investment.
John Neff liked to find stocks whose TRR was 50% higher than that of the market or the sector. Here, I used this equation to run a screen against my database of about 6000 stocks and simply picked the top 10 (which turned into the top 11 because because two stocks tied for the tenth spot on the list).
|Total Return Ratio||Symbol||Name||Sector||Last Price||PE||PEG||Dividend|
|20.00||SMP||Standard Motor Products, Inc.||Energy||$9.17||25.07||0.05||0.2|
|7.14||SNHY||Sun Hydraulics||Capital Goods||$22.99||36.48||0.14||0.36|
|6.67||GLNG||Golar LNG Ltd||Consumer Services||$9.99||28.14||0.15||0.2|
|4.55||REP||Repsol YPF S.A.||Energy||$22.38||11.23||0.22||0.87|
China Petroleum & Chemical
|3.71||NM||Navios Maritime Holdings||Transportation||$5.29||7.21||0.27||0.24|
|3.71||NC||NACCO Industries||Capital Goods||$77.83||10.71||0.27||2.09|
Do you have some familiarity with any of the stocks on this list that you would like to share with other readers? Then please leave a comment!
Note: This list is based on data gathered last weekend. We'll run this screen again after this coming weekend and see if we get some new candidates.
Disclosure: No positions