I am a value investor at heart. It's not that I despise growth, but usually growth stocks come at a price I am unwilling to pay. However, that does not preclude me from looking, hence this week's screen. Normally, I derive my own criteria for these screens, but often the same names keep popping up. This week, I decided to use one of Scottrade's standard screens called "Strong Growth & Value Stocks." The criteria were as follows:
Number of Consecutive Quarters of Non-Negative vs. Negative Earnings: Greater than or equal to three and less than four quarters of non-negative earnings
Payout Ratio: Above Industry Average
Dividend Yield: Greater than or equal to 0 and less than 1000
Now if you are looking at that criteria and wondering how Scottrade arrived at the name Strong Growth & Value, join the club. Apparently, Scottrade defines a growth stock as one which has had precisely three quarters of non-negative earnings. A value stock is a company that pays out a higher portion of its earnings in dividends than its industry peers. These are peculiar definitions, but no matter since I am only looking for new names to jump-start the research process. The screen yielded 93 stocks, so in the interest of winnowing the list and to placate my inner cheapskate, I added another requirement: That stocks be trading within 20% of their 52 week lows. The list reduced down to the eight names below:
Prices as of
EV / EBITDA
Debt to EBITDA
Avon Products Inc
0.92 (5.05%) ex-div:"Nov 10"
Best Buy Co Inc
0.62 (2.44%) ex-div:"Dec 29"
Becton Dickinson and Co
1.68 (2.17%) ex-div:"Dec 8"
Frontier Communications Corp
0.752 (17.49%) ex-div:"Dec 7"
Pitney Bowes Inc
1.48 (7.59%) ex-div:"Nov 16"
RR Donnelley and Sons Co
1.04 (8.38%) ex-div:"Jan 25"
Tiffany and Co
1.12 (1.73%) ex-div:"Dec 16"
0.80 (2.39%) ex-div:"Nov 9"
Since investors generally favor growth stocks and pay up accordingly, my 52-week low requirement effectively biases the screen toward value stocks. However, each of these stocks has a positive PEG ratio, which indicates analysts are forecasting earnings growth, however meager. Interestingly, all eight stocks pay substantive dividends ranging from 1.7% to as high as 17.5%. Despite the quizzical name of the screen, this list presents some intriguing companies that may be suitable for a wide range of investment and risk outlooks.
Frontier, Pitney Bowes and RR Donnelley offer substantial yields but their share prices indicate the market believes these dividends and to some extent, their business models are unsustainable. Of course, the market is not always right and if investors can pick which stock(s) are likely to buck the negative sentiment, a big dividend plus substantial capital appreciation may await, but the risk is high.
On the other end of the spectrum, Becton-Dickinson and Walgreen offer a stable business model, historically consistent free cash flow and promising future prospects, but shares are trading at my estimated fair value. Warren Buffett has long subscribed to the maxim of paying a fair price for a great company. While Becton-Dickinson and Walgreen are not bargains, per se, investors are not overpaying at these prices and both companies look set to grow in the long-term.
Readers can view in-depth financial metrics, including my estimated fair value based on free cash flow, in spreadsheet format here. Summaries of all eight stocks follow below:
Avon Products, Inc. creates, manufactures and markets beauty and non-beauty-related products in the categories of Beauty, Fashion and Home. Avon generated stellar returns of 44% ROE (vs. industry's 7%) and 16% ROI (vs. 5%).
Best Buy Co., Inc. is a multinational retailer of consumer electronics, home office products, entertainment products, appliances and related services, It operates retail stores and call centers, and conducts online retail operations. Best Buy delivered 19% ROE (vs. industry's 16% and 14% ROI (vs. 11%). On an EV/EBITDA basis, Best Buy was the cheapest stock in the screen and while its business position is probably not as secure as Becton Dickinson and Walgreen, it is selling at a marked discount to my estimated fair value. (As always, these estimates are very rough and are used only as guides to further research.) While not as cheap as Frontier, Pitney Bowes and RR Donnelley on a FCF basis, the stock is considerably less risky than those names and may be a good option for conservative investors.
Becton, Dickinson and Company is a global medical technology company engaged in the development, manufacturing and sale of medical devices, instrument systems and reagents used by healthcare institutions, life science researchers, clinical laboratories, the pharmaceutical industry and the general public. Becton Dickinson delivered returns of 25% ROE (vs. industry's 11%) and 13% ROI (vs. 9%). A solid company with a manageable debt load and the highest FCF return on assets of the screen, I estimate Becton Dickinson to be selling near fair value.
Frontier Communications Corporation is a telecommunications company providing services predominantly to rural areas and small and medium-sized towns and cities. Frontier's returns of 3% ROE (vs. industry's 7%) and 1% ROI (vs. 5%) lagged peers. Share prices have fallen drastically due to continued customer losses, declining revenue in its higher margin businesses, a large debt load over 3x EBITDA and concerns about the recent Verizon transaction that more than doubled the company's size. Its current yield of 17.5% suggests the market is convinced that a dividend cut is coming. Even so, shares appear attractive. As with most telecoms, Frontier generates copious free cash flow that should be able to cover debt payments and a substantial dividend payout. Even if Frontier cuts its dividend by 50% or even 75%, it would still yield an attractive 9% or 4.5%. That's nothing to sneeze at when the 30-year U.S. Treasury barely yields 3%. Even with a negative 5% growth rate for the next 5 years, I still see value in these shares and estimate Frontier to be worth $6 - $8.
Pitney Bowes Inc. is a provider of mail processing equipment and integrated mail solutions. The company offers a range of equipment, supplies, software, services and end-to-end solutions, which enable its customers to manage and integrate physical and digital communication channels. Pitney Bowes is another company affected by technological change and perhaps some headline risk as the USPS continues to struggle with losses. Even so, it is hard to imagine the post office disappearing completely and Pitney Bowes looks undervalued even when I take declining cash flow into account. However, unlike Frontier, shares are not trading at a steep enough discount to warrant the risk of investment.
R.R. Donnelley & Sons Company is a global provider of integrated communications. The company operates primarily in the commercial print portion of the printing industry, with related product and service offerings designed to offer customers complete solutions for communicating their messages to target audiences. RR Donnelley generated 12% ROE (vs industry's 5%) and 3% ROI (vs. 0.5%). Like Frontier and Pitney Bowes, RR Donnelley is another company seeing its business affected by the move toward digital communications. In addition, the commercial printing business is extremely cyclical and vulnerable to intense pricing pressures due to a fragmented industry and overcapacity. Nevertheless, R.R. Donnelley has managed to generate positive free cash flow every year even during the recession. Its yield, at 8%, suggests investors are skeptical the company can maintain its payout and the company also has a high debt load over 3x EBITDA. But at these levels, shares look awfully enticing. I estimate RR Donnelley to be worth at least $17.
Tiffany & Co. is a holding company that, through its subsidiaries, sells fine jewelry and other items that it manufactures or has been made by others. Tiffany generated 21% ROE (vs. industry's 20%) and 14% ROI (vs. 16%). Perhaps its brand name and high-end market accounts for its share price premium as I find Tiffany to be overvalued on a FCF basis, even as it trades near 52 week lows.
Walgreen Co. operates a drugstore chain in the United States and provides its customers with multichannel access to consumer goods and services, and pharmacy, health and wellness services in communities across America. Walgreen delivered returns of 19% ROE (vs. industry's 14%) and 14% ROI (vs. 11%). While investors are concerned about potential partner disputes, the company appears well positioned for the long-term. The stock is trading at fair value now but if it were to drop from here, I would take a closer look.
Disclosure: I am long FTR.