I use the Dugan Scoring System to determine the "top" companies which meet the filtering criteria. Those criteria are:
- being in the top-Dugan-scoring half of the non-REIT and non-MLP companies on the "All CCC" list
- Minimum 7 years on the CCC list.
- Minimum yield of 2.5%.
- Minimum $3B market cap.
- Maximum relative Graham number of 100.
- Maximum payout ratio of 80.
- Minimum most-recent dividend increase of 5%.
- Minimum estimated EPS growth next year of 5%.
- Minimum estimated EPS growth for the next 5 years of 5%/year.
The Dugan Scoring System is a tool to identify those CCC companies which are, overall, the highest quality, and which should produce better investing results than otherwise would be attained by simply filtering for desired characteristics. In this context, quality means companies which have:
Strong current conditions, as exemplified by: great value as measured by relative Graham number, low payout ratio, low debt/equity ratio and high Most Recent dividend increase % Excellent future prospects, as exemplified by: high EPS growth forecasts for This Year, Next Year and 5 years out, and excellent dividend growth histories.
Simply put, the Dugan Scoring System is a disciplined, systematic approach that evaluates each CCC stock on the basis of a wide variety of investment criteria from four broad categories: Risk, Value, Past Performance and Future Performance Expectations.
The System is illustrated here:
No stocks, like no people, are perfect. Even high quality and high scoring stocks have weaknesses. A Dugan Score is a balanced, holistic picture of a stock, which includes its strengths and weaknesses. The following is a summary of the metrics used in the Dugan Scoring System, along with each metric's relative weighting in the overall formula. The weightings are my assessment of each metric's relative importance in calculating the company's overall quality.
Good folks can quibble about the relative weightings. The above weightings reflect my thoughts and values, but can be changed by any enterprising SA reader who is facile with Excel.
Using the Dugan Scoring System and the above filters yields the following as the highest scoring April 2016 CCC companies:
Let's take a closer look at one of the top companies, Prudential (NYSE:PRU), using FASTGraphs and the information in the CCC list above:
In the CCC picture above PRU scored very well in Dugan Score at an impressively high 118. I think the highest score ever was 128. PRU has excellent yield and size at almost over 4% and $32B respectively. Its most recent dividend increase at 21%, low payout ratio of 23% and very attractive valuation with a relative Graham number of minus 56%, coupled with expected EPS growth of 6%/year for next year and 8%/yr for the next 5 years mark PRU as a company with a solid current condition and very attractive future potential. Let's not forget that future predictions are based on analysts' expectations. Capping off the explanation for why PRU scored so well is the great DGR history, being in the double digits for all 3 periods shown. That's truly impressive.
Let's now double check the impressive past, present and future with a few FASTGraphs below:
Note, above, a P/E ratio of only 7.3 versus an historical almost 12, a long term earnings growth rate of 10.5%, a low debt to capitalization ratio of 34% and an investment grade credit rating of single A. But what about the future.
Follow the red line from its current position to year-end 2017. If PR gets back to its normal P/E ratio of 12.8, it would provide an impressive 38.28%/year rate of return until y/e 2017. Note that from the time of its demutualization until the great recession, 6 years, PRU tracked its fair value (orange) line. As with almost all financial companies, it has suffered low P/E performance since the great recession. It's hard to understand why getting back to its normal P/E should be difficult. But, thorough due diligence about the company and industry is certainly warranted.
I hope you enjoyed this journey. Comments are encouraged. Happy investing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. (Borrowed from Chuck Carnevale.)
Disclosure: I am/we are long PRU, BBY, QCOM, XOM, TGT.
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.