- Ranking the top twenty Russell 3000 stocks, that pay a dividend with higher than 5% yield, according to principles of the well-known investor Joel Greenblatt.
- Explanation and back-testing of the "All-Stars: Greenblatt" ranking system.
- Description and a buy recommendation for the first ranked stock of the system; PDL BioPharma, Inc. (PDLI).
About half of the Russell 3000 stocks pay dividends. In fact, 1,551 of them pay some dividends, 1,292 companies have a yield greater of 1%; 815 companies have a yield greater of 2%; 473 companies have a yield greater of 3%, and 158 companies have a yield greater of 5%.
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 several groups of pre-built ranking systems, I used one of them the "All-Stars: Greenblatt" in this article. The ranking system is based on investing principles of the well-known investor Joel Greenblatt.
The "All-Stars: Greenblatt" ranking system is taking into account just two factors; Return on Capital and Earnings Yield (E/P) in equal proportions.
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 twenty groups according to their ranking. The chart clearly shows that the average annual return has a very significant positive correlation to the "All-Stars: Greenblatt" rank. The highest ranked group with the ranking score of 95-100, which is shown by the light blue column in the chart, has given by far the best return, an average annual return of about 20%, while the average annual return of the Russell 1000 index during the same period was about 3.2% (the red column at the left part of the chart). Also, the second and the third group (scored: 85-90 and 90-95) have given superior returns. This brings me to the conclusion that the ranking system is very useful.
After running "All-Stars: Greenblatt" ranking system on all Russell 3000 stocks that pay a dividend with higher than 5% yield, on July 11, I discovered the twenty best stocks, which are shown in the table below. In this article, I will focus on the first stock of the list PDL BioPharma, Inc. (NASDAQ:PDLI).
PDL BioPharma, Inc. manages a portfolio of patents and royalty assets. The company is involved in the humanization of monoclonal antibodies and the discovery of a new generation of targeted treatments for cancer and immunologic diseases. The company was founded in 1986 and is headquartered in Incline Village, Nevada.
The table below presents the valuation metrics of PDLI; the data were taken from Yahoo Finance and finviz.com.
PDLI's valuation metrics are exceptionally good; the forward P/E is very low at 4.70, the PEG ratio is extremely low at 0.34, and the Enterprise Value/EBITDA ratio is also extremely low at 3.67.
According to James P. O'Shaughnessy, the Enterprise Value/EBITDA ratio is the best-performing single value factor. In his impressive book "What Works on Wall Street", Mr. O'Shaughnessy demonstrates that 46 years back-testing, from 1963 to 2009, have shown that companies with the lowest EV/ EBITDA ratio have given the best return. Mr. O'Shaughnessy explains that EV/ EBITDA is a better way to assess value-that is, how cheap or expensive it is-than looking at the P/E ratio alone. The EV/ EBITDA is neutral to a company's capital structure and capital expenditures. Stocks that have very high debt levels often have low P/E ratios, but this does not necessarily mean that they are cheap in relation to other securities.
Latest Quarter Results
On May 12, PDLI reported its first-quarter 2014 financial results, which missed EPS expectations by $0.01 (-2.20%) and beat Street's estimates on revenues.
The company reported that total revenues for the first quarter of 2014 increased 52 percent to $139.7 million from $91.8 million in the first quarter of 2013. Net income in the first quarter of 2014 was $72.9 million, or $0.44 per diluted share, as compared with net income in the first quarter of 2013 of $53.5 million, or $0.36 per diluted share. The increase in net income in the first quarter is primarily due to the increase in royalty revenues.
Net cash provided by operating activities in the first quarter of 2014 was $91.8 million, compared with $52.9 million in the first quarter of 2013. At March 31, 2014, PDL had cash, cash equivalents and investments of $337.6 million, compared with $99.5 million at December 31, 2013.
Next Quarter Results
PDLI will report its second-quarter 2014 financial results on August 04. PDLI is expected to post a profit of $0.46 a share, a 25.8% decline from the company's actual earnings for the same quarter a year ago.
PDLI has been paying dividends since 2008. The forward annual dividend yield is very high at 6.26% and the payout ratio only 30.2%.
Source: Charles Schwab
Since PDLI is generating strong cash flow and the payout ratio is very low, I believe that the company is well-positioned to achieve steady dividend growth going forward.
A comparison of key fundamental data between PDLI and its main competitors is shown in the table below.
PDLI has the lowest P/E ratio and the lowest EV/ EBITDA ratio among the stocks in the group. Moreover, its PEG ratio is much lower than those of its competitors. 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 lower PEG means that the stock is more undervalued.
The charts below give some technical analysis information.
The PDLI stock price is 0.87% below its 20-day simple moving average, 4.52% above its 50-day simple moving average and 13.80% above its 200-day simple moving average. That indicates a long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.1064 and descending, which is a bearish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 63.01 which do not indicate oversold or overbought conditions.
Only three analysts are covering the stock all of them rate it as a hold.
PDLI's stock is doing well this year; since the beginning of the year, PDLI's stock has gained 13.5%, while the S&P 500 index has increased 6.3%, and the Nasdaq Composite Index has risen 5.3%. However, since the start of 2013, PDLI's stock has gained only 36.1%, while the S&P 500 index has increased 37.8%, and the Nasdaq Composite Index has risen 45.6%.
On June 06, PDL BioPharma announced revenue guidance for the second quarter ending June 30, 2014, of approximately $140 million, as compared with actual revenue of $143.6 million for the second quarter of 2013, an approximate 3 percent decrease. In the announcement, the company explained:
While the licensed products' sales increased quarter over quarter, the projected decrease in royalty revenues is a result of the current fixed royalty rate of 2.125 percent on net sales of Avastin, Herceptin, Lucentis, Xolair, Perjeta and Kadcyla in 2014 compared to the combination of tiered and fixed royalty rates applicable in the second quarter of 2013. Previously, Genentech Products that were made or sold in the United States were subject to tiered royalty rates dependent on aggregate net sales and Genentech Products both made and sold outside of the United States were subject to a fixed royalty rate of 3 percent.
In my opinion, the fact that licensed products' sales increased quarter over quarter is very positive for the company. Moreover, PDL BioPharma stated that second quarter royalty revenues will increase on a sequential basis.
PDLI has exceptionally compelling valuation metrics and strong earnings growth prospects; its Enterprise Value/EBITDA ratio is extremely low at 3.67. Furthermore, PDLI's stock is ranked first among all Russell 3000 stocks yielding more than 5%, according to Portfolio123's "All-Stars: Greenblatt" powerful ranking system. PDLI has a strong cash position of $337.6 million, and it is paying a very generous dividend yield of 6.26%, which is, in my opinion, sustainable. All these factors lead me to the conclusion that PDLI stock is a long-term smart investment right now.