Are There Any Deals Among The Dividend Challengers? Part III

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Includes: DNFGF, DOW, KLAC, KMT, KSS, KW, KWR, LAD, LAZ, LB, LBAI, LCUT, LEA, LFUS, LHO, LII, LM, LMAT, LMNR, LNC, LTC, LTXB, LVS, LXK, LXP, LYB, M, MA, MAA, MAC, MAIN, MAN, MAR, MBWM, MCK, MCO, MEOH, MGA, MHLD, MIC, MJN, MKSI, MKTX, MLGF, MLR, MMC, MMLP, MNRK, MOFG, MORN, MOV, MPC, MRK, MRLN, MSFG, MSI, MTN, MYE, NDAQ, NEWP, NGL, NOV, NP, NRIM, NSP, NWBI, NWL, OCBI, OGE, OII, OLP, OMC, ONB, ORCL, OTCM, OXM, PACW, PAG, PAYX, PCAR, PCBK, PCTI, PDCO, PEG, PETS, PFE, PFG, PFS, PKG, PLOW, PM, PNBI, PNC, PNM, POL, POOL, POPE, PPBN, PPS, PRA, PRI, PRIM, PROV, PRU, PSA, QNBC, QNTO
by: Accelerating Dividends

Summary

A combination of the discounted cash flow, Graham valuation formula, EBIT and Katesenelson Absolute PE valuation models were used to derive a fair value.

Out of another 104 dividend challengers covered in this article, 44 companies had a margin of safety above 0%.

A total of 21 dividend challengers have both an average and a median margin of safety greater than 25%.

INTRODUCTION

This is the second article where I use a four model valuation analysis to derive fair value estimates for the members of the dividend challengers from David Fish's Dividend Champion, Challenger and Contender list (available here). The previous articles of this series have covered:

  • Dividend champions (available here)
  • Dividend contenders Part I (here) Part II (here)
  • Dividend challengers Part I (here) Part II (here)
  • Commonly held dividend stocks (available here)

There are a total of 418 dividend challengers. The first and second articles covered the first 208 companies in alphabetical order by ticker symbol from the CCC list. This article covers the next 104 dividend challengers.

For those of you who are new to this series, the valuation models are described below.

THE VALUATION MODELS

DISCOUNTED CASH FLOW VALUATION

Discounted cash flow [DCF] is the most commonly known valuation tool. The DCF is a valuation model used to estimate the attractiveness of an investment opportunity. Discounted cash flow analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment.

BENJAMIN GRAHAM VALUATION FORMULA

The Graham number measures a stock's fundamental value by taking into account the company's earnings per share and book value per share. The Graham number is the upper bound of the price range that a defensive investor should pay for the stock. According to the theory, any stock price below the Graham number is considered undervalued, and thus worth investing in.

EBIT VALUATION

The EBIT Valuation model is primarily an income statement and balance sheet adjustment model to get the fair value of the equity of the stock. The EBIT model takes the EPS and reverse engineers it to come up with a normalized revenue number by reverse engineering all of the margins that it's been achieving until now. And then with that revenue, the main driver behind the model comes down to selecting the valuation multiple for what you want to apply to the stock. EBIT valuation is a simple way to perform a sum of the parts analysis. It takes into consideration revenues, operating margins, cash and equivalents, total debt and shares outstanding. EBIT also has the strength of recognizing that depreciation and amortization are real asset expenses.

KATESENELSON ABSOLUTE PE VALUATION

The Absolute PE valuation is made up of the earnings growth rate, dividend yield, business risk, financial risk and earnings visibility. Essentially, the Absolute PE takes the current PE and then adds or subtracts points to come up with an adjusted PE value. Rather than trying to calculate difficult growth projections, the Absolute PE reverse engineers the PE ratio to come up with a growth rate.

By using these models, there are four fair values or intrinsic values calculated that take into consideration many different factors of a company. Each has its own strengths and weakness which makes it more powerful to consider all four valuation models to determine a fair value for a stock.

ANALYSIS

The current price is the end of day closing price of May 11, 2016. Each of the valuation models are found in separate columns. An average and median fair value is calculated using all four valuation models. The margin of safety between the fair value and the current price is calculated using both the average and median fair value estimates. Those in red show that there is no margin of safety. Those in yellow suggest a margin of safety between 0% and 24.99%. Those in green suggest a margin of safety greater than 25%. A buy price is also included using a margin of safety of 25% from the average and median fair value estimates. The stocks are ordered alphabetically by ticker symbol.

Company

Ticker

Current Price

DCF

EBIT Valuation

Absolute PE

Graham Valuation

Average Fair Value

Average MOS

Average Buy Price (25% MOS)

Median Fair Value

Median MOS

Median Buy Price (25% MOS)

KLA-Tencor Corp.

(NASDAQ:KLAC)

$69.85

$71.83

$50.44

$84.98

$100.88

$77.03

10.28%

$61.63

$78.41

12.25%

$62.72

Kennametal Inc.

(NYSE:KMT)

$23.16

-$60.02

-$6.81

-$7.12

$8.30

-$16.41

-170.87%

-$13.13

-$6.97

-130.07%

-$5.57

Kohl's Corp.

(NYSE:KSS)

$41.18

$38.66

$45.58

$54.39

$53.47

$48.03

16.62%

$38.42

$49.53

20.26%

$39.62

Kennedy-Wilson Holdings Inc.

(NYSE:KW)

$20.61

-$45.17

$9.65

$0.60

-$7.72

-$10.66

-151.72%

-$8.53

-$3.56

-117.27%

-$2.85

Quaker Chemical Corp.

(NYSE:KWR)

$85.94

$72.02

$74.71

$96.40

$80.83

$80.99

-5.76%

$64.79

$77.77

-9.51%

$62.22

Lithia Motors Inc.

(NYSE:LAD)

$84.74

$130.15

$100.67

$85.35

$229.50

$136.42

60.98%

$109.13

$115.41

36.19%

$92.33

Lazard Limited

(NYSE:LAZ)

$34.68

$130.91

$21.40

$71.97

$61.66

$71.49

106.13%

$57.19

$66.82

92.66%

$53.45

L Brands Inc.

(NYSE:LB)

$69.16

$76.01

$74.97

$87.50

$73.63

$78.03

12.82%

$62.42

$75.49

9.15%

$60.39

Lakeland Bancorp Inc.

(NASDAQ:LBAI)

$11.16

$9.26

$9.92

$13.43

$16.76

$12.34

10.60%

$9.87

$11.68

4.61%

$9.34

Lifetime Brands Inc.

(NASDAQ:LCUT)

$17.03

$8.75

$16.58

$18.27

$8.17

$12.94

-24.00%

$10.35

$12.67

-25.63%

$10.13

Lear Corp.

(NYSE:LEA)

$116.32

$214.22

$109.51

$141.80

$305.56

$192.77

65.73%

$154.22

$178.01

53.03%

$142.41

Littelfuse Inc.

(NASDAQ:LFUS)

$112.59

$92.24

$97.51

$126.51

$129.83

$111.52

-0.95%

$89.22

$112.01

-0.52%

$89.61

LaSalle Hotel Properties

(NYSE:LHO)

$25.19

$10.60

$34.34

$34.60

$22.04

$25.40

0.81%

$20.32

$28.19

11.91%

$22.55

Lennox International Inc.

(NYSE:LII)

$138.79

$88.80

$105.53

$151.56

$169.82

$128.93

-7.11%

$103.14

$128.55

-7.38%

$102.84

Legg Mason Inc.

(NYSE:LM)

$31.55

$54.93

$27.94

$1.78

$56.85

$35.38

12.12%

$28.30

$41.44

31.33%

$33.15

LeMaitre Vascular Inc.

(NASDAQ:LMAT)

$15.86

$12.92

$12.51

$18.33

$12.76

$14.13

-10.91%

$11.30

$12.84

-19.04%

$10.27

Limoneira Company

(NASDAQ:LMNR)

$16.79

$14.88

$19.08

$17.60

$9.84

$15.35

-8.58%

$12.28

$16.24

-3.28%

$12.99

Lincoln National Corp.

(NYSE:LNC)

$42.99

$493.04

$469.76

$53.78

$119.33

$283.98

560.57%

$227.18

$294.55

585.15%

$235.64

LTC Properties Inc.

(NYSE:LTC)

$48.14

$13.23

$39.35

$55.08

$40.11

$36.94

-23.26%

$29.55

$39.73

-17.47%

$31.78

LegacyTexas Financial Group Inc.

(NASDAQ:LTXB)

$24.49

$27.16

$28.25

$30.01

$35.86

$30.32

23.81%

$24.26

$29.13

18.95%

$23.30

Las Vegas Sands Corp.

(NYSE:LVS)

$46.12

$43.36

$42.17

$63.49

$49.04

$49.52

7.36%

$39.61

$46.20

0.17%

$36.96

Lexmark International Inc.

(NYSE:LXK)

$37.70

-$14.79

-$26.04

-$5.07

$19.93

-$6.49

-117.22%

-$5.19

-$9.93

-126.34%

-$7.94

Lexington Realty Trust

(NYSE:LXP)

$9.20

$1.42

$9.89

$13.28

$9.03

$8.41

-8.64%

$6.72

$9.46

2.83%

$7.57

LyondellBasell Industries NV

(NYSE:LYB)

$81.87

$155.05

$79.86

$135.92

$162.65

$133.37

62.90%

$106.70

$145.49

77.70%

$116.39

Macy's Inc.

(NYSE:M)

$31.38

$54.07

$46.61

$57.39

$54.72

$53.20

69.53%

$42.56

$54.40

73.34%

$43.52

MasterCard Inc.

(NYSE:MA)

$96.41

$85.60

$96.00

$114.29

$83.20

$94.77

-1.70%

$75.82

$90.80

-5.82%

$72.64

Mid-America Apartment Communities Inc.

(NYSE:MAA)

$100.68

$15.06

$92.94

$118.47

$85.32

$77.95

-22.58%

$62.36

$89.13

-11.47%

$71.30

Macerich Company

(NYSE:MAC)

$77.64

-$2.53

$78.19

$91.28

$55.01

$55.49

-28.53%

$44.39

$66.60

-14.22%

$53.28

Main Street Capital Corp.

(NYSE:MAIN)

$31.91

$49.92

$59.86

$53.46

$25.32

$47.14

47.73%

$37.71

$51.69

61.99%

$41.35

ManpowerGroup Inc.

(NYSE:MAN)

$77.16

$111.35

$81.02

$93.36

$114.81

$100.14

29.78%

$80.11

$102.36

32.65%

$81.88

Marriott International Inc.

(NYSE:MAR)

$68.92

$67.97

$72.16

$85.09

$86.21

$77.86

12.97%

$62.29

$78.63

14.08%

$62.90

Mercantile Bank Corp.

(NASDAQ:MBWM)

$23.50

$20.27

$19.41

$28.04

$20.55

$22.07

-6.10%

$17.65

$20.41

-13.15%

$16.33

McKesson Corp.

(NYSE:MCK)

$168.89

$158.15

$214.42

$149.41

$232.45

$188.61

11.67%

$150.89

$186.29

10.30%

$149.03

Moody's Corp.

(NYSE:MCO)

$94.90

$97.41

$95.57

$109.62

$96.94

$99.89

5.25%

$79.91

$97.18

2.40%

$77.74

Methanex Corp.

(NASDAQ:MEOH)

$30.43

$122.74

$60.77

$45.06

$0.66

$57.31

88.33%

$45.85

$52.92

73.89%

$42.33

Magna International Inc.

(NYSE:MGA)

$40.77

$91.77

$52.15

$53.02

$99.68

$74.16

81.89%

$59.32

$72.40

77.57%

$57.92

Maiden Holdings Ltd.

(NASDAQ:MHLD)

$12.41

$85.54

$65.88

$23.13

$23.74

$49.57

299.46%

$39.66

$44.81

261.08%

$35.85

Macquarie Infrastructure Company LLC

(NYSE:MIC)

$69.17

-$41.34

$9.82

$64.13

$9.63

$10.56

-84.73%

$8.45

$9.73

-85.94%

$7.78

Mead Johnson Nutrition Co.

(NYSE:MJN)

$85.06

$55.79

$80.67

$93.46

$62.22

$73.04

-14.14%

$58.43

$71.45

-16.01%

$57.16

MKS Instruments Inc.

(NASDAQ:MKSI)

$36.32

$68.45

$36.30

$46.04

$51.62

$50.60

39.32%

$40.48

$48.83

34.44%

$39.06

MarketAxess Holdings Inc.

(NASDAQ:MKTX)

$128.71

$42.70

$99.34

$148.43

$52.59

$85.77

-33.37%

$68.61

$75.97

-40.98%

$60.77

Malaga Financial Corp.

(OTCPK:MLGF)

$22.49

-

-

-

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Miller Industries Inc.

(NYSE:MLR)

$20.42

$15.48

$17.28

$25.44

-

$19.40

-5.00%

$15.52

$17.28

-15.38%

$13.82

Marsh & McLennan Companies Inc.

(NYSE:MMC)

$63.90

$52.03

$52.39

$76.01

$65.11

$61.39

-3.94%

$49.11

$58.75

-8.06%

$47.00

Martin Midstream Partners LP

(NASDAQ:MMLP)

$22.51

$0.86

$15.13

$27.55

$7.96

$12.88

-42.80%

$10.30

$11.55

-48.71%

$9.24

Monarch Financial Holdings Inc.

(NASDAQ:MNRK)

$18.16

$10.00

$15.98

$22.58

$9.20

$14.44

-20.48%

$11.55

$12.99

-28.47%

$10.39

MidWest One Financial Group Inc.

(NASDAQ:MOFG)

$28.03

$30.46

$32.68

$33.83

$39.21

$34.05

21.46%

$27.24

$33.26

18.64%

$26.60

Morningstar Inc.

(NASDAQ:MORN)

$82.24

$40.33

$86.60

$89.47

$54.65

$67.76

-17.60%

$54.21

$70.63

-14.12%

$56.50

Movado Group Inc.

(NYSE:MOV)

$25.07

$57.40

$31.39

$32.60

$42.46

$40.96

63.39%

$32.77

$37.53

49.70%

$30.02

Marathon Petroleum Corp.

(NYSE:MPC)

$35.90

$49.83

$29.88

$51.70

$52.36

$45.94

27.97%

$36.75

$50.77

41.41%

$40.61

Merck & Company

(NYSE:MRK)

$54.31

$23.99

$53.51

$61.31

$47.71

$46.63

-14.14%

$37.30

$50.61

-6.81%

$40.49

Marlin Business Services Corp.

(NASDAQ:MRLN)

$14.51

$78.09

$69.86

$20.25

$26.94

$48.79

236.22%

$39.03

$48.40

233.56%

$38.72

MainSource Financial Group Inc.

(NASDAQ:MSFG)

$21.16

$24.01

$20.88

$27.01

$29.65

$25.39

19.98%

$20.31

$25.51

20.56%

$20.41

Motorola Solutions Inc.

(NYSE:MSI)

$70.07

$50.93

$69.37

$73.52

$74.72

$67.14

-4.19%

$53.71

$71.45

1.96%

$57.16

Vail Resorts Inc.

(NYSE:MTN)

$127.77

$61.07

$112.88

$138.03

$85.08

$99.27

-22.31%

$79.41

$98.98

-22.53%

$79.18

Myers Industries Inc.

(NYSE:MYE)

$14.13

$4.56

$13.16

$31.90

$6.99

$14.15

0.16%

$11.32

$10.08

-28.70%

$8.06

Nasdaq Inc.

(NASDAQ:NDAQ)

$63.62

$36.95

$47.17

$72.47

$64.62

$55.30

-13.07%

$44.24

$55.90

-12.14%

$44.72

NGL Energy Partners LP

(NYSE:NGL)

$13.10

-$12.72

$17.19

-$0.59

-$3.66

$0.06

-99.58%

$0.04

-$2.13

-116.22%

-$1.70

National Oilwell Varco Inc.

(NYSE:NOV)

$32.36

-$22.61

-$9.24

-$17.15

-$13.80

-$15.70

-148.52%

-$12.56

-$15.48

-147.82%

-$12.38

Neenah Paper Inc.

(NYSE:NP)

$66.66

$46.56

$57.83

$65.25

$73.91

$60.89

-8.66%

$48.71

$61.54

-7.68%

$49.23

Northrim BanCorp Inc.

(NASDAQ:NRIM)

$27.27

$24.61

$26.77

$35.91

$23.32

$27.65

1.40%

$22.12

$25.69

-5.79%

$20.55

Insperity Inc.

(NYSE:NSP)

$65.73

$52.05

$45.22

$90.52

$91.75

$69.89

6.32%

$55.91

$71.29

8.45%

$57.03

Northwest Bancshares Inc.

(NASDAQ:NWBI)

$14.20

$2.87

$10.71

$14.51

$7.26

$8.84

-37.76%

$7.07

$8.99

-36.73%

$7.19

Newell Rubbermaid Inc.

(NYSE:NWL)

$48.41

$23.01

$38.70

$70.94

$63.07

$48.93

1.07%

$39.14

$50.89

5.11%

$40.71

Orange County Bancorp Inc.

(OTCPK:OCBI)

$46.50

-

-

-

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OGE Energy Corp.

(NYSE:OGE)

$30.79

$14.34

$31.87

$36.48

$22.39

$26.27

-14.68%

$21.02

$27.13

-11.89%

$21.70

Oceaneering International Inc.

(NYSE:OII)

$33.06

$19.67

$41.51

$42.78

$10.07

$28.51

-13.77%

$22.81

$30.59

-7.47%

$24.47

One Liberty Properties Inc.

(NYSE:OLP)

$23.18

-$7.47

$19.56

$28.41

$25.43

$16.48

-28.89%

$13.19

$22.50

-2.96%

$18.00

Omnicom Group Inc.

(NYSE:OMC)

$84.12

$54.85

$81.63

$91.90

$76.52

$76.23

-9.39%

$60.98

$79.08

-6.00%

$63.26

Old National Bancorp

(NYSE:ONB)

$12.52

$4.41

$12.28

$14.65

$15.01

$11.59

-7.45%

$9.27

$13.47

7.55%

$10.77

Oracle Corp.

(NASDAQ:ORCL)

$39.65

$36.55

$41.28

$44.44

$43.16

$41.36

4.31%

$33.09

$42.22

6.48%

$33.78

OTC Markets Group Inc.

(OTCQX:OTCM)

$16.82

$19.90

$10.46

-

-

$15.18

-9.75%

$12.14

$15.18

-9.75%

$12.14

Oxford Industries Inc.

(NYSE:OXM)

$59.91

$30.00

$62.22

$37.30

$69.59

$49.78

-16.91%

$39.82

$49.76

-16.94%

$39.81

PacWest Bancorp

(NASDAQ:PACW)

$38.69

$35.51

$38.55

$53.20

$51.23

$44.62

15.33%

$35.70

$44.89

16.02%

$35.91

Penske Automotive Group Inc.

(NYSE:PAG)

$35.84

$21.86

$49.71

$40.72

$71.89

$46.05

28.47%

$36.84

$45.22

26.16%

$36.17

Paychex Inc.

(NASDAQ:PAYX)

$52.21

$33.64

$34.99

$63.15

$34.46

$41.56

-20.40%

$33.25

$34.73

-33.49%

$27.78

Paccar Inc.

(NASDAQ:PCAR)

$56.94

$36.85

$59.19

$59.74

$68.02

$55.95

-1.74%

$44.76

$59.47

4.43%

$47.57

Pacific Continental Corp.

(NASDAQ:PCBK)

$16.30

$16.23

$15.94

$23.40

$20.56

$19.03

16.76%

$15.23

$18.40

12.85%

$14.72

PCTEL Inc.

(NASDAQ:PCTI)

$4.73

$0.24

$0.80

-$0.36

$4.79

$1.37

-71.09%

$1.09

$0.52

-89.01%

$0.42

Patterson Companies Inc.

(NASDAQ:PDCO)

$43.72

$31.75

$48.76

$47.74

$42.28

$42.63

-2.49%

$34.11

$45.01

2.95%

$36.01

Public Service Enterprise Group Inc.

(NYSE:PEG)

$46.37

$26.62

$35.40

$59.54

$25.82

$36.85

-20.54%

$29.48

$31.01

-33.12%

$24.81

PetMed Express Inc.

(NASDAQ:PETS)

$18.99

$12.46

$14.93

$26.54

$7.74

$15.42

-18.81%

$12.33

$13.70

-27.88%

$10.96

Pfizer Inc.

(NYSE:PFE)

$33.16

$17.16

$32.72

$35.22

$34.68

$29.95

-9.70%

$23.96

$33.70

1.63%

$26.96

Principal Financial Group Inc.

(NYSE:PFG)

$42.52

$317.44

$299.70

$63.20

$73.43

$188.44

343.19%

$150.75

$186.57

338.77%

$149.25

Provident Financial Services Inc.

(NYSE:PFS)

$19.45

$0.85

$14.28

$23.59

$20.17

$14.72

-24.31%

$11.78

$17.23

-11.44%

$13.78

Packaging Corp of America

(NYSE:PKG)

$66.16

$64.91

$75.46

$87.41

$88.63

$79.10

19.56%

$63.28

$81.44

23.09%

$65.15

Douglas Dynamics Inc.

(NYSE:PLOW)

$21.43

$22.77

$21.44

$30.80

$16.77

$22.95

7.07%

$18.36

$22.11

3.15%

$17.68

Philip Morris International

(NYSE:PM)

$101.80

$60.61

$78.13

$125.29

$72.71

$84.19

-17.30%

$67.35

$75.42

-25.91%

$60.34

Pioneer Bankshares Inc.

(OTCPK:PNBI)

$22.75

$32.88

$19.49

-

-

$26.19

15.10%

$20.95

$26.19

15.10%

$20.95

PNC Financial Services Group Inc.

(NYSE:PNC)

$86.34

$81.53

$89.70

$98.88

$104.08

$93.55

8.35%

$74.84

$94.29

9.21%

$75.43

PNM Resources Inc.

(NYSE:PNM)

$33.06

-$18.63

$35.16

$28.14

$24.66

$17.33

-47.57%

$13.87

$26.40

-20.15%

$21.12

PolyOne Corp.

(NYSE:POL)

$36.74

$26.60

$33.52

$36.41

$41.48

$34.50

-6.09%

$27.60

$34.97

-4.83%

$27.97

Pool Corp.

(NASDAQ:POOL)

$89.97

$61.80

$76.11

$108.66

$77.53

$81.03

-9.94%

$64.82

$76.82

-14.62%

$61.46

Pope Resources LP

(NASDAQ:POPE)

$64.60

-$31.82

$57.41

$69.12

-

$31.57

-51.13%

$25.26

$57.41

-11.13%

$45.93

Pinnacle Bankshares Corp.

(OTCQX:PPBN)

$20.13

$88.42

$11.67

-

-

$50.05

148.61%

$40.04

$50.05

148.61%

$40.04

Post Properties Inc.

(NYSE:PPS)

$60.10

$2.73

$59.27

$66.34

$42.11

$42.61

-29.10%

$34.09

$50.69

-15.66%

$40.55

ProAssurance Corp.

(NYSE:PRA)

$48.61

$112.97

$113.61

$65.29

$40.03

$82.98

70.70%

$66.38

$89.13

83.36%

$71.30

Primerica Inc.

(NYSE:PRI)

$50.49

$125.15

$95.60

$60.39

$91.34

$93.12

84.43%

$74.50

$93.47

85.13%

$74.78

Primoris Services Corp.

(NASDAQ:PRIM)

$21.77

$13.33

$21.46

$20.97

$22.45

$19.55

-10.19%

$15.64

$21.22

-2.55%

$16.97

Provident Financial Holdings Inc.

(NASDAQ:PROV)

$18.28

$8.68

$2.74

$20.82

$8.80

$10.26

-43.87%

$8.21

$8.74

-52.19%

$6.99

Prudential Financial Inc.

(NYSE:PRU)

$76.21

$1,112.84

$979.97

$117.85

$156.82

$591.87

676.63%

$473.50

$568.40

645.83%

$454.72

Public Storage

(NYSE:PSA)

$259.28

$107.31

$253.97

$309.50

$148.42

$204.80

-21.01%

$163.84

$201.20

-22.40%

$160.96

QNB Corp.

(OTCPK:QNBC)

$30.75

$10.74

$28.17

-

-

$19.46

-36.73%

$15.56

$19.46

-36.73%

$15.56

Quaint Oak Bancorp Inc.

(OTCQX:QNTO)

$11.75

$13.31

$12.83

-

-

$13.07

11.23%

$10.46

$13.07

11.23%

$10.46

Click to enlarge

To access the table with the color coded scheme, I am providing readers with access to a Google Sheet (here).

Here are a couple of findings from this analysis:

  • There are a total of 44 companies that have an average and median margin of safety above 0%.
  • Of the 44 companies, 21 companies have an average and median margin of safety above 25%.
  • The breakdown by sector can be seen in the following chart. Stocks with a margin of safety above 25% are listed under the sector name.

Click to enlarge

  • There were 2 companies with insufficient data to complete all of the valuation models (MLGF, OCBI)
  • There were 7 companies with insufficient data to complete 1 or 2 of the valuation models (MLR, OTCM, PNBI, POPE, PPBN, QNBC, QNTO)

In this next section, I am going to go over the 5 companies that have a MOS of at least 25%. There are a lot of options this time around so I will be taking a look at some companies that are less known.

LYONDELLBASELL INDUSTRIES NV

LYB fair value Click to enlarge

LyondellBasell Industries NV engages in the refinery and production of chemicals and plastics. It operates through the following segments: Olefins and Polyolefins-Americas (O&P-Americas), Olefins and Polyolefins-Europe, Asia, International (O&P-EAI), Intermediates and Derivatives (I&D), Refining and Technology.

LYB has a high average margin of safety or potential upside of 62.9% for an average fair value estimate of $133.37. The median margin of safety or potential upside is even greater at 77.7% for a median fair value estimate of $145.49. The EBIT valuation estimates that LYB is currently overvalued while the Graham valuation estimates that the stock could double from current levels.

LYB has a current forward dividend yield of 4.21% with a payout ratio of 32.7%. LYB raised its dividend last Friday by 9.0% which marks 6 consecutive annual dividend increases. This raise came in below the 1 (11.8%), 3 (19.3%) and 5 (44.0%) dividend growth rates which means that the company's dividend increases are decelerating. Along with the dividend announcement, LYB authorized a new share repurchase program to repurchase up to 10% of the company's shares over the next 18 months. This would represent the repurchase of over 38M shares and reduce the number of outstanding share from 426.73M to 387.94M.

LYB was affected by four major production unit outages in April, the first that began on April 8 when a massive fire broke out at its Houston refinery. That fire forced the company to cut output by as much as 25%. LYB failed in its first attempt to restart the crude distillation unit. The refinery had been operating at 32% since April 15. Over the past few months, LYB has received two downgrades from analysts how one of them reiterated that LYB has an industry-leading buyback program and organic growth. Another analyst stated that they believe that LYB is better positioned to benefit from a rebound in oil prices than its competitors such as Dow Chemical (NYSE:DOW). Another analyst placed LYB on a list of 28 U.S. value plays due to its FCF yield. LYB also acquired Zylog Plastalloys, an India-based polypropylene maker. This deal will double LYB's automotive customer base in India and make it the third largest producer of polypropylene compounds in the country. This acquisition follows one made either when LYB bought SJS Plastiblends which manufactures polypropylene compounds to build plastic automotive parts in India. Lastly, the company announced in November 2015 that it plans to build the world's largest propylene oxide and tertiary butyl alcohol plant near Houston. Propylene oxide is a chemical used to make everything from antifreeze to cosmetics and tertiary butyl alcohol is a by-product used as a solvent to make chemicals and gasoline additives.

In 2009 LYB voluntarily filed for Chapter 11 bankruptcy protection and emerged as LYB as it stands today. Since emerging from bankruptcy, the valuation ratios of the company are impressive. There have been only a few years where a ratio declined but in all cases, the ratios have recovered and surpassed the previous bests. In 2014, the company became a free cash flow generating machine with a FCF/S ratio of 10.0% which increased to 13.4% in 2015. The FCF yield has been steadily increasing but experienced a setback in 2013. The FCF yield shows that the company's free cash flow generation is increasing contributing to the growth of its market capitalization. ROE, ROA, ROIC and CROIC are presently at all-time highs with most above 20%. Also, the company is currently generating an increasing return, now standing at $0.30 for every dollar of FCF invested. This is very positive and good news for future dividend increases.

LYB valuation ratios Click to enlarge

MOVADO GROUP INC.

MOV fair value Click to enlarge

Movado Group, Inc. designs, manufactures and distributes watches. It operates through the Wholesale and Retail segments. The Wholesale segment includes the design, development, sourcing, marketing and distribution of watches, in addition to after-sales service activities and shipping. The Retail segment includes the company's outlet stores.

The average fair value estimate of MOV is $40.96 suggesting an average margin of safety of 63.4%. The median fair value estimate if $37.53 suggesting a median margin of safety of 49.7%. The EBIT and Absolute PE valuations estimate a lower upside potential than the others. The DCF estimates that the stock could double from its current price.

MOV's dividend yield is presently 2.06% with a payout ratio of 23.2%. On March 31, 2016, MOV raised its dividend by 18.2%. This is a slight raise compared to the previous dividend increase (15.8%) but is below the 3 (34.7%) and 5 (37.4%) year dividend growth rates. This may be a sign that the company's dividend increases are stabilizing.

MOV's stock price is greatly affected by news released from other high-end retailers. Recently, MOV was affected by the recent report from Fossil (NASDAQ:FOSL) regarding how F/X ravaged their sales and margins which was then compounded with a sense of weakening US consumer apparel spending observed from the earnings calls from companies such as M. The stock price shed over 10% following FOSL's report and another 2.3% following M's report. Even when the company reported that its own net sales rose 10% on a constant currency basis, the gross margin rate improved to 52.5%, operating margins increased to 9% and inventory declined to 4.9% in Q4, the stock still sold off. An analyst predicts that 2016 will be a very tough year for Swiss watchmakers like MOV due to weak tourism, F/X, and competition from smartwatch makers such as Apple (NASDAQ:AAPL) that offer products at lower price points. MOV has taken the steps of partnering with HP (NYSE:HPQ) to create a high-end smartwatch and two Silicon Valley firms to design new smartwatch collections.

MOV is not for the faint of heart as the following weekly price chart shows. Although the stock price recovered from the great recession lows and made new highs, the stock price has shed close to 50% of its value in 2 years. Many of the declines as well as the increases occurred when reports were issued from competitors or retail companies in general. It appears that MOV has but a little impact on its stock price. Although the margin of safety is high for MOV, the price chart shows that the trend is not the investor's friend right now and the future growth potential of the industry remains uncertain and where there is uncertainty, stock prices tend to follow downward.

Click to enlarge

PRUDENTIAL FINANCIAL INC.

PRU fair value Click to enlarge

Prudential Financial, Inc. provides a wide range of insurance, investment management, and other financial products and services to both individual and institutional customers throughout the United States and in many other countries through its subsidiaries. Its principal products and services provided include life insurance, annuities, retirement-related services, mutual funds, and investment management. The company has organized its principal operations into two: Financial Services businesses and Closed Block business.

When considering all four valuation models, PRU has a whopping 676.6% average margin of safety and a 645.8% median margin of safety. This represents an average fair price estimate of $591.87 and a median fair price estimate of $568.40. These estimates are strongly influenced by the DCF and the EBIT valuations. However, I would recommend focusing more on the Absolute PE and Graham valuations for a more realistic estimate. When only these two valuation models are applied, the average and median margin of safety is 80.2% with fair value estimates of $137.34.

PRU current dividend is 3.71% with a payout ratio of 23.7%. The last dividend increase was announced on November 10, 2015. PRU raised the dividend by 20.7% at that time. This was higher than the 1 (12.4%), 3 (15.1%) and 5 (16.2%) dividend growth rates which until that time had been steadily decreasing. PRU has now paid a dividend for 7 consecutive years.

PRU is considered a systemically important financial institution [SIFI]. This means that PRU should the company go bankrupt, it is likely to pose a serious risk to the economy due to its importance and size. As a result of the Dodd-Frank law, PRU has stricter regulations to adhere to. There are higher capital requirements that effectively limit how much PRU can borrow which can have an impact of profitability. Any firm designated as a SIFI are subject to greater oversight from the Federal Reserve, are required to pass stress tests, writing bankruptcy plans which are known as living wills and must meet the stricter capital requirements. PRU accepted the designation without a fight. MetLife (NYSE:MET), one of PRU competitors, did fight the designation and won an important judgment that begins the process of removing the designation from MET. PRU may also be affected by new retirement rules issued by the Department of Labour last month. The rules would impose a fiduciary standard which would ultimately force the asset management industry away from the business of collecting commissions for moving products, and into more responsible fee generation based on total assets managed. Insurers like PRU who provide variable annuities could be also pressured by these rules. PRU, like other financial institutions, is also affected by the current FED interest policy. Lower rates have a negative effect on financial institutions.

PRU has a very impressive quality when analyzing the Piotroski F Score. In 2015, the company had a perfect 9 out of 9. PRU has averaged a 7 over the past 10 years, and has averaged an 8 over the past 5 years. Some of the highlights include continuous improvements in operating cash flows and quality of earnings which never dropped over that 10 year period. More specifically, PRU had positive operating cash flow year over year and the cash flow from operations was greater than the ROA year over year. The one area where PRU appears to have had difficulties is the number of shares outstanding. In 2006, the company had 484.2M shares outstanding whereas in 2015 the company had 451.7M which is a reduction of 6.7% over 10 years. Based on the Piotroski F Score, it does not appear as though low interest rates, and negative sentiment on the financial sector are affecting the company considerably. The company continues to improve despite the difficult environment and government legislation.

PRU Piotroski F Scores Click to enlarge

MKS INSTRUMENTS INC.

MKSI fair value Click to enlarge

MKS Instruments, Inc. provider of instruments, subsystems and process control solutions that measure, control, power, monitor and analyze critical parameters of advanced manufacturing processes to improve process performance and productivity. The company also provides services relating to the maintenance and repair of its products, software maintenance, installation services and training. It operates through four segments: Advanced Manufacturing Capital Equipment, Global Service, Asia Region Sales and Other.

MKSI has an average fair value estimate of $50.60 representing a 39.3% average margin of safety while the median fair value estimate is $48.83 representing a 34.4% median margin of safety. The EBIT valuation model estimates that MKS is currently fairly valued with no upside potential. The other three models estimate notably different upside potential with the DCF estimating that the stock could nearly double from current levels.

MKSI offers a 1.87% current yield which represents a payout ratio of 34.3%. Investors were likely disappointed this month when the company did not raise its dividend. The last time the dividend was increased was May 5, 2015 when it was raised by 3.0%. MKSI has not been big on dividend increase. The 1 (3.1%) and 3 (2.9%) year dividend grow rates were all in the same range suggesting that investors might not expect to generate much income from MKSI. Due to the low dividend yield and the low growth, most dividend growth investors would have eliminated MKSI as an investment option.

There has not been much news being released from the company. In February 2015, it reached an agreement to acquire Newport (NASDAQ:NEWP) for $980M in cash. Newport is a scientific and technical instruments manufacturer that operates through the photonics, lasers and optics segments. A review of articles published on SA suggests that several authors were bullish on the stock.

This article by Dividend Garden suggests that MKSI is a free cash cow. I have to agree. The company has a free cash flow margin that is well above 10% over the past 1, 3, 5, and 10 year periods. A company with a free cash flow margin above 5% receives the cow designation. In the current year, MKSI currently has a free cash flow margin of over 15%. The valuation ratios shown below are not nearly as impressive however. The company appears to have had more difficult years than otherwise. Although MKSI has rebounded in 2014, the valuation ratios remain below previous highs. The FCF/S ratio does corroborate the free cash flow margin in assessing MKSI has a free cash flow generating machine. This is positive indicator for dividend payouts and may spur higher increases in the future should this trend continue. It may be a wise choice as well to see if the synergies expected to come from the Newport acquisition are realized and whether this will contribute to the possibility of higher dividend payouts.

MKSI valuation ratios Click to enlarge

MAGNA INTERNATIONAL INC.

MGA fair value Click to enlarge

Magna International, Inc. designs, develops and manufactures automotive systems, assemblies, modules and components. It assembles complete vehicle, primarily for sale to original equipment manufacturers of cars and light trucks in North America, Europe, Asia, South America and Africa. The company provides whole vehicle body, chassis, interior, exterior, seating, powertrain, electronic, vision, closure and roof systems and modules, as well as complete vehicle engineering and contract manufacturing.

MGA has an average upside potential of 81.9% and a median upside potential of 77.6%. The average fair value estimate is $74.16 and the median fair value estimate is $72.40. The EBIT and Absolute PE valuation models have a near consensus fair value estimate of $52.15 and $53.02 respectively while the DCF and Graham valuation models estimate a fair value of $91.77 and $99.68 respective which represents a double from the current price.

MGA has a dividend yield of 3.30% and a payout ratio of 18.8%. MGA raised its dividend by 13.6% on February 25, 2016. Compared with the 1 (15.8%), 3 (17.0%) and 5 (28.1%) dividend growth rates, this latest raise continues to decelerating dividend growth pattern. MGA has now paid out a dividend for 6 consecutive years.

MGA is rarely in the news but is still involved in important projects. Last month, MGA announced that its joint venture with Dongfeng Motor Group (OTCPK:DNFGF) began production on a third generation dual-clutch transmission for small cars. A report surfaced last month as well that Apple had a lab operating out of Germany that appears to be using German manufacturing and parts supplied by MGA to develop AAPLs electric vehicle. In December 2015, Credit Suisse named MGA the top auto and auto parts company for 2016 because it is well-positioned due to the trend toward "vehicle globalization." This is important to note because several auto parts companies are also found in this article and have margins of safety above 25% such as LEA and PAG. However, MGA does have a fairly important exposure to Volkswagen (OTCPK:VLKAY) with 11% of its 2014 revenue coming from VW. VW was therefore ranked as MGA sixth biggest customer. VW as most know is embroiled in an emissions scandal however the company did recently report that its European cars sales rose 9% in April and the overall group sales was positive (up 5.3%) for the first time since the scandal.

For unknown reasons, my data supplier has only 3 years of financial data while Yahoo Finance and other sources are no better. Therefore, I will focus a little on the technical aspects of the stock price action. MGA has dropped about 50% from June 2015 to February 2016. The stock met a great deal of resistance at the $60.00 range. Recently, the stock has had difficulty rising above $44.00 but has not dipped below $39.00 either. This suggest a trading range where the stock may break to the downside further if it cannot stay above this support line. Barchart.com currently rates MGA a sell based on 12 technical indicators. One thing to remember however is that MGA supplies auto parts which is positive as more cars were sold over the last two years, and as new innovations or connectivity drive customer interest in acquiring new vehicles. MGA may be able to profit from the overall automobile industry momentum.

Click to enlarge

Click to enlarge

CONCLUSION

The dividend challengers continue to add further stock ideas with many companies with margins of safety of 25% or more. Not all are wise investments and some like MKSI may never be considered as investments for dividend growth investors. This exercise has also helped isolate certain companies within a particular industry like MGA in the auto and auto parts industry. By comparing the margins of safety, it can help rank which companies investors may want to further investigate first.

Part IV will cover the remaining 104 dividend challengers.

Disclosure: I am/we are long LYB.

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.

Additional disclosure: I may consider initiating a position in PRU over the next 72 hours. Nothing in this article should be construed as a recommendation to buy, sell or short any equities.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.