The Most Undervalued And Overvalued Dividend Champions - February 2016

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Includes: ADM, ATO, AWR, BCR, BEN, CB, CBSH, CLC, CLX, CTWS, DCI, DOV, EV, HP, HRL, KMB, LANC, MCD, MDU, MGEE, MO, MSEX, NC, NDSN, NFG, ORI, PNR, PNY, RAVN, RLI, RPM, SCL, SEIC, SPGI, VFC, WBA, WGL
by: The Part-time Investor

Summary

A stock with a yield higher than usual may be undervalued.

A stock with a yield lower than usual may be overvalued.

Here is the February 2016 list of the most undervalued and overvalued stocks, based on a comparison to historical yield.

In June, I started a series of articles in which I highlight the stocks from the Dividend Champions list that have the highest and the lowest Percent Above the Average Yield (PAAY) over the past year and over the past five years. PAAY is a measure of how much a stock is above (high PAAY, undervalued) or below (low PAAY, overvalued) its usual yield, and can be an indication that the stock is mis-priced. Please see my previous article for the January 2015 list. In this article, I present the updated list for February. Please note that the Dividend Champions list is maintained by DAVID FISH. I trust him to maintain the list, and I assume that the information he presents is accurate. Any changes to the list are made by him. All historical price and dividend data used to calculate the PAAY was taken from Yahoo Finance. I attempted to correct any errors that I found or that were pointed out to me by others.

Before I start, as I do in each of these articles, let me give a quick review of the thought process behind PAAY for those who are not familiar with it. Many stocks can trade within a fairly consistent range of yields over time. But if you find a stock that is trading at a higher yield than it usually does, it may be an indication that it is undervalued. There can be two reasons for an above-average yield: the price is down, or the dividend has increased. Or, of course, it could be a combination of both. If the price is down, and yet the business prospects of the business are unchanged, then it is a good buying opportunity. If the dividend has increased, and the stock price has not yet risen to keep up with the increased dividend, this again gives you an opportunity to buy more shares and increase your dividend income at a relatively low price. Therefore, tracking the dividend yield and comparing it to the historical average of that stock can highlight times when it may be undervalued. I call this Percent Above Average Yield. Take the present yield, subtract the historical average yield, and divide the result by the historical average yield (and multiply by 100 to turn it into a percent) to come up with the PAAY. The higher the PAAY, the more undervalued the stock may be. The lower the PAAY, the more overvalued it may be.

When I make my decisions about reinvesting my dividends, I use the one-year PAAY to determine which of my stocks are most undervalued. The stocks in question are ones I already own, and I am therefore looking for opportunities where one or more of my stocks is down for a short period of time, but may be expected to rebound. I'm looking to take advantage of short-term opportunities to add more shares. But others may be looking for longer-term trends. They may think that a longer-term yield average is more significant in terms of looking for investment opportunities, and would therefore want to use a five-year average. On the other hand, they may be thinking that some stocks may be overvalued, and should be sold. In this case, the PAAY would be low. So, in this article, I present the top 10 PAAY stocks and the bottom 10 PAAY stocks from the Dividend Champions list for both the one-year and five-year periods. Stocks with high PAAYs may be candidates to be bought. Stocks with low PAAYs possibly should be avoided, or if already owned, might be candidates to be sold. Please note, nothing I present here should be considered an absolute recommendation to buy or sell any stock. This is just meant to be a possible starting place for further research. Everybody should do their own due diligence when making transaction decisions. Just because a stock is on this list does not mean it definitely should be bought or sold.

So, without further ado, here is the list of Dividend Champions as of February 1st, with the highest and lowest one-year and five-year PAAY.

Changes to the Champions List

Chubb Corp (NYSE:CB) was removed from the Champions list since it was taken over by ACE Limited. There are now 106 Champions.

February Lists

1 yr High PAAY

(Short Term Undervalued?)

Stock

Yield

Ave Yield

PAAY

Franklin Resources (NYSE:BEN)

2.08%

1.41%

47.29%

Eaton Vance (NYSE:EV)

3.70%

2.75%

34.68%

SEI Investments (NASDAQ:SEIC)

2.65%

2.02%

31.10%

Clarcor (NYSE:CLC)

1.88%

1.48%

27.27%

McGraw Hill (NYSE:MHFI)

1.69%

1.34%

26.68%

Pentair (NYSE:PNR)

2.80%

2.23%

25.73%

Archer-Daniels-Midland (NYSE:ADM)

3.17%

2.54%

24.76%

Nordson (NASDAQ:NDSN)

1.59%

1.29%

23.41%

Raven Ind. (NASDAQ:RAVN)

3.46%

2.82%

22.96%

RPM International (NYSE:RPM)

2.80%

2.29%

22.21%

Click to enlarge

Additions since last month's list:

SEI - The stock price has dropped 25.11% in the past month. This has brought the PAAY up to 31.10%.

McGraw Hill - The price has dropped by 13.76%, in the past month, which has brought the PAAY up to 26.68%.

RPM International- The price has dropped by 10.92% in the past month. This has brought the PAAY up to 22.21%.

Removals from last month's list:

National Fuel Gas Co (NYSE:NFG) - The stock price has risen by 6.04% over the past month. This has dropped its PAAY down to 19.67% from 31.64%.

VF Corp (NYSE:VFC) - The price has risen by 0.56%, which has brought the PAAY down to 22.13% from 26.7%.

Nacco Ind. (NYSE:NC) - The price has increased by 12.77% in the past month. This has brought the PAAY down to 6.97% from 23.17%.

1 yr Low PAAY

(Short Term Overvalued?)

Stock

Yield

Ave Yield

PAAY

Piedmont Natural Gas (NYSE:PNY)

2.23%

3.16%

-29.58%

Middlesex Water (NASDAQ:MSEX)

2.74%

3.30%

-16.86%

McDonald's (NYSE:MCD)

2.88%

3.37%

-14.75%

Connecticut Water Serv. (NASDAQ:CTWS)

2.49%

2.90%

-14.04%

WGL Holdings (NYSE:WGL)

2.77%

3.21%

-13.58%

Atmos Energy (NYSE:ATO)

2.43%

2.80%

-13.46%

Hormel (NYSE:HRL)

1.44%

1.66%

-13.10%

MGE Energy (NASDAQ:MGEE)

2.44%

2.76%

-11.79%

Kimberly-Clark (NYSE:KMB)

2.74%

3.10%

-11.64%

American States Water (NYSE:AWR)

1.97%

2.20%

-10.46%

Click to enlarge

Additions since last month's list:

Connecticut Water Services - The stock price has increased 12.94% in the past month. Its PAAY has dropped to -14.04% from -3.40%.

WGL Holdings - The price has increased 6.03% in the past month. Its PAAY has dropped to -13.58% from -8.80%.

Atmos Energy - The price has increased 9.80% in the past month. Its PAAY has dropped to -13.46% from -5.30%.

MGE Energy - The price has increased 4.42% in the past month. Its PAAY has dropped to -11.79% from 7.76%.

American States Water - The price has increased 8.22% in the past month. Its PAAY has dropped to -10.46% from -3.13%.

Removals from last month's list:

Old Republic Intl (NYSE:ORI) - The price has dropped 2.95% in the past month, bringing the PAAY up to -10.01% from -14.17%.

Chubb Corp - Bought out by ACE Limited

RLI Corp (NYSE:RLI) - The price has decreased by 3.97% in the past month. This has brought the PAAY up to -7.51% from -12.29%.

Lancaster Colony Corp (NASDAQ:LANC) - The price has decreased by 11.93% in the past month. This has brought the PAAY up to 2.96% (it is actually now slightly undervalued) from -10.91%.

Clorox (NYSE:CLX) - CLX has actually become even more over-priced in the last month, with a price increase of 1.75%, bringing the PAAY down to -10.37% from -9.79%. It has simply been knocked out of the top 10 by other stocks.

5 yr High PAAY

(Long Term Undervalued?)

Stock

Yield

Ave Yield

PAAY

Helmrich & Payne (NYSE:HP)

5.42%

2.43%

123.02%

Franklin Resources

2.08%

1.00%

107.65%

Raven Ind.

3.46%

1.84%

88.15%

Donaldson Corp. (NYSE:DCI)

2.41%

1.47%

64.46%

Clarcor

1.88%

1.19%

58.25%

Dover Corp. (NYSE:DOV)

2.87%

1.91%

50.70%

Pentair

2.80%

1.86%

50.61%

Nordson

1.59%

1.06%

50.35%

MDU Resources (NYSE:MDU)

4.44%

2.98%

49.19%

Stepan Co (NYSE:SCL)

1.69%

1.18%

42.98%

Click to enlarge

Additions since last month's list:

MDU Resources - The price has dropped 7.86% in the past month, bringing the 5-year PAAY up to 49.19% from 38.62%.

Stepan Co - The price has decreased 9.52% in the past month. This has brought its 5-year PAAY up to 42.98% from 31.51%.

Removals from last month's list:

NACCO Ind. - The stock price has increased 12.77% in the past month. Its 5-year PAAY has dropped to 35.75% from 55.98%, dropping it out of the top 10.

National Fuel Gas Co - The price has increased 6.04% in the past month. Its 5-year PAAY has dropped to 35.57% from 44.73%.

5 yr Low PAAY

(Short Term Overvalued?)

Stock

Yield

Ave Yield

PAAY

Piedmont Natural Gas

2.23%

3.55%

-37.21%

WGL Holdings

2.77%

3.79%

-26.82%

Atmos Energy

2.43%

3.29%

-26.19%

American States Water

1.97%

2.64%

-25.35%

Middlesex Water

2.74%

3.65%

-24.92%

Commerce Bancshares (NASDAQ:CBSH)

2.19%

2.91%

-24.87%

Old Republic Intl

4.09%

5.40%

-24.23%

Clorox

2.39%

3.09%

-22.85%

Bowl America (BWL-A)

4.76%

6.13%

-22.40%

Altria (NYSE:MO)

3.70%

4.72%

-21.69%

Click to enlarge

Additions since last month's list:

Atmos Energy - The price has increased 9.80% in the past month. Its 5-year PAAY has dropped to -26.19% from -19.71%.

American States Water - The price has increased 8.22% in the past month. Its 5-year PAAY has dropped to -25.35% from -19.82%.

Middlesex Water - The price has increased 9.27% in the past month. Its 5-year PAAY has dropped to -24.92% from -18.35%.

Altria - The price has increased 4.98% in the past month. Its 5-year PAAY has dropped to -21.69% from -18.38%.

Removals from last month's list:

SEI Investments - The price has dropped 25.11% in the past month. This has brought the PAAY up to -12.23% from -34.68%.

RLI Corp - The price has decreased by 3.97% in the past month. This has brought the PAAY up to -21.18% from -24.63%.

Walgreen's Boots Alliance (NASDAQ:WBA) - The price has decreased by 6.38% in the past month. This has brought the PAAY up to -16.66% from -22.61%.

CR Bard (NYSE:BCR) - The price has dropped 3.26% in the past month. This has brought the PAAY up to -19.36% from -22.77%.

Conclusion

I believe that a stock's present yield, when compared to its historical yield (either one-year or five-year), can be a strong indicator of either undervaluation or overvaluation, and is a good starting point for further research into possible purchases or sales. But I stress again, this is only a starting point. More research into any of these stocks is necessary to make any final decisions. The yield for any particular stock may be up because the business prospects for that company are in decline, and the inevitable dividend cut has just not been announced yet. On the other hand, the yield may be up simply because the price is down due to global market forces unrelated to the business prospects of that particular company. Or the company may have just recently raised its dividend, and the stock price has not caught up yet to the increased payout. It is up to the individual investor to try to determine which of these is the case. But by using PAAY, you may find some opportunities that you otherwise would have been unaware of. And since these are all Dividend Champions, they have all shown a strong dividend culture and dividend payment history, which makes them worthy of further investigation.

Thank you for reading my article. I welcome your comments and criticisms.

Disclosure: I am/we are long WBA, MCD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.