Are There Any Deals Among The Dividend Challengers? Part IV Finale

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Includes: RCL, RECN, RGA, RL, RLJ, ROIC, ROK, RS, SAFT, SASR, SBGI, SBRA, SBUX, SCI, SCS, SE, SFNC, SHLM, SIG, SIX, SLB, SLG, SMG, SMP, SNA, SNI, SOHO, SOMC, SPG, SPTN, SPY, SSB, SSI, SSW, STAG, STI, STJ, STLD, STRT, STT, STWD, STX, SUN, SXI, SYBT, TBNK, TCAP, TECH, TEL, TG, THO, TILE, TLLP, TRGP, TRN, TRNO, TSCO, TTC, TUP, TWX, TXRH, TYBT, TYC, TYPE, UBOH, UBSH, UDR, UFS, UMPQ, UNH, UNM, UNP, UPS, USB, USPH, V, VIAB, VLO, VTR, WAB, WAFD, WASH, WAYN, WBS, WCN, WDFC, WDR, WEN, WES, WFC, WFM, WHR, WINA, WLTW, WMPN, WOR, WPPGY, WPZ, WRI, WRK, WSBC, WTBA, WY, WYN, XRAY, XYL
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 106 dividend challengers covered in this article, 43 companies had a margin of safety above 0%.

A total of 13 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:

There are a total of 418 dividend challengers. The first, second and third articles covered the first 312 companies in alphabetical order by ticker symbol from the CCC list. This article covers the next 106 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.

In short, the DCF is cash flow based.

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.

In short, the Graham formula is optimistic earnings based.

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.

In short, the EBIT seeks to find equity value based on operating income.

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 June 1, 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)

Royal Caribbean Cruises Ltd.

(NYSE:RCL)

$77.50

$54.61

$77.40

$84.01

$144.93

$90.24

16.44%

$72.19

$80.71

4.14%

$64.56

Resources Connection Inc.

(NASDAQ:RECN)

$15.19

$14.89

$14.25

$18.53

$12.36

$15.01

-1.20%

$12.01

$14.57

-4.08%

$11.66

Reinsurance Group of America Inc.

(NYSE:RGA)

$98.18

$761.89

$743.80

$128.73

$152.24

$446.67

354.94%

$357.33

$448.02

356.33%

$358.42

Ralph Lauren Corp.

(NYSE:RL)

$93.93

$88.47

$122.44

$103.38

$107.78

$105.52

12.34%

$84.41

$105.58

12.40%

$84.46

RLJ Lodging Trust

(NYSE:RLJ)

$19.89

$5.53

$22.07

$32.72

$16.94

$19.32

-2.89%

$15.45

$19.51

-1.94%

$15.60

Retail Opportunity Investments Corp.

(NASDAQ:ROIC)

$20.07

-$8.45

$19.71

$20.36

$13.79

$11.35

-43.44%

$9.08

$16.75

-16.54%

$13.40

Rockwell Automation Inc.

(NYSE:ROK)

$115.75

$94.36

$105.57

$150.16

$83.33

$108.36

-6.39%

$86.68

$99.97

-13.64%

$79.97

Reliance Steel & Aluminum Co.

(NYSE:RS)

$73.85

$59.46

$60.62

$84.72

$77.02

$70.46

-4.60%

$56.36

$68.82

-6.81%

$55.06

Safety Insurance Group Inc.

(NASDAQ:SAFT)

$59.44

$70.92

$124.01

$73.94

$33.35

$75.56

27.11%

$60.44

$72.43

21.85%

$57.94

Sandy Spring Bancorp Inc.

(NASDAQ:SASR)

$29.04

$27.66

$30.54

$36.29

$28.17

$30.67

5.60%

$24.53

$29.36

1.08%

$23.48

Sinclair Broadcast Group Inc.

(NASDAQ:SBGI)

$30.62

-$25.37

$43.37

$30.86

$30.40

$19.82

-35.29%

$15.85

$30.63

0.03%

$24.50

Sabra Health Care REIT Inc.

(NASDAQ:SBRA)

$20.10

$18.54

$20.77

$47.97

$68.53

$38.95

93.79%

$31.16

$34.37

71.00%

$27.50

Starbucks Corp.

(NASDAQ:SBUX)

$55.15

$49.92

$51.74

$59.80

$49.66

$52.78

-4.30%

$42.22

$50.83

-7.83%

$40.66

Service Corp International

(NYSE:SCI)

$27.32

$20.77

$34.13

$26.45

$24.62

$26.49

-3.03%

$21.19

$25.54

-6.53%

$20.43

Steelcase Inc.

(NYSE:SCS)

$15.66

$23.13

$15.88

$20.57

$27.96

$21.89

39.75%

$17.51

$21.85

39.53%

$17.48

Spectra Energy Corp.

(NYSE:SE)

$31.64

-$11.35

$27.44

$31.90

$17.49

$16.37

-48.26%

$13.10

$22.47

-29.00%

$17.97

Simmons First National Corp.

(NASDAQ:SFNC)

$47.56

$31.33

$33.08

$53.58

$55.84

$43.46

-8.63%

$34.77

$43.33

-8.89%

$34.66

A. Schulman Inc.

(NASDAQ:SHLM)

$25.77

$4.10

$18.24

$25.41

$32.42

$20.04

-22.23%

$16.03

$21.83

-15.31%

$17.46

Signet Jewelers Limited

(NYSE:SIG)

$108.37

$134.15

$122.64

$118.44

$196.17

$142.85

31.82%

$114.28

$128.40

18.48%

$102.72

Six Flags Entertainment Corp.

(NYSE:SIX)

$58.59

$20.10

$50.90

$66.20

$30.18

$41.85

-28.58%

$33.48

$40.54

-30.81%

$32.43

Schlumberger Limited

(NYSE:SLB)

$77.91

$33.09

$59.73

$78.88

$22.90

$48.65

-37.56%

$38.92

$46.41

-40.43%

$37.13

SL Green Realty Corp.

(NYSE:SLG)

$100.39

-$57.96

$109.54

$108.64

$93.77

$63.50

-36.75%

$50.80

$101.21

0.81%

$80.96

Scotts Miracle-Gro Company

(NYSE:SMG)

$69.06

$26.42

$44.73

$76.50

$66.57

$53.56

-22.45%

$42.84

$55.65

-19.42%

$44.52

Standard Motor Products Inc.

(NYSE:SMP)

$37.95

$39.87

$36.77

$44.04

$53.36

$43.51

14.65%

$34.81

$41.96

10.55%

$33.56

Snap-on Inc.

(NYSE:SNA)

$162.67

$137.38

$150.46

$218.51

$165.99

$168.09

3.33%

$134.47

$158.23

-2.73%

$126.58

Scripps Networks Interactive Inc.

(NYSE:SNI)

$62.88

$70.25

$79.47

$75.44

$93.44

$79.65

26.67%

$63.72

$77.46

23.18%

$61.96

Sotherly Hotels Inc.

(NASDAQ:SOHO)

$5.02

-$16.81

$5.30

$7.77

$12.48

$2.19

-56.47%

$1.75

$6.54

30.18%

$5.23

Southern Michigan Bancorp Inc.

(OTCPK:SOMC)

$25.49

$112.52

$15.13

-

-

$63.83

150.39%

$51.06

$63.83

150.39%

$51.06

Simon Property Group Inc.

(NYSE:SPG)

$196.09

$15.44

$196.06

$228.65

$172.27

$153.11

-21.92%

$122.48

$184.17

-6.08%

$147.33

SpartanNash Company

(NASDAQ:SPTN)

$27.86

$15.05

$26.73

$17.08

$25.61

$21.12

-24.20%

$16.89

$21.35

-23.38%

$17.08

South State Corp.

(NASDAQ:SSB)

$72.24

$71.54

$76.04

$88.17

$81.10

$79.21

9.65%

$63.37

$78.57

8.76%

$62.86

Stage Stores Inc.

(NYSE:SSI)

$5.36

$0.45

$18.92

$1.85

$5.24

$6.62

23.41%

$5.29

$3.55

-33.86%

$2.84

Seaspan Corp.

(NYSE:SSW)

$14.71

$0.43

$49.45

$15.58

$17.62

$20.77

41.20%

$16.62

$16.60

12.85%

$13.28

STAG Industrial Inc.

(NYSE:STAG)

$20.95

-$7.60

$27.94

-$2.35

$20.30

$9.57

-54.31%

$7.66

$8.98

-57.16%

$7.18

SunTrust Banks Inc.

(NYSE:STI)

$43.98

$39.86

$52.35

$53.26

$44.77

$47.56

8.14%

$38.05

$48.56

10.41%

$38.85

St. Jude Medical Inc.

(NYSE:STJ)

$77.44

$42.09

$54.78

$73.13

$66.63

$59.16

-23.61%

$47.33

$60.71

-21.61%

$48.56

Steel Dynamics Inc.

(NASDAQ:STLD)

$24.60

-$24.29

-$21.48

-$0.80

$46.31

-$0.06

-100.26%

-$0.05

-$11.14

-145.28%

-$8.91

STRATTEC Security Corp.

(NASDAQ:STRT)

$47.08

$78.68

$58.75

$56.17

$58.40

$63.00

33.81%

$50.40

$58.58

24.42%

$46.86

State Street Corp.

(NYSE:STT)

$63.68

$53.39

$66.58

$69.82

$69.34

$64.78

1.73%

$51.83

$67.96

6.72%

$54.37

Starwood Property Trust Inc.

(NYSE:STWD)

$20.37

$51.68

$53.44

$33.28

$23.50

$40.48

98.70%

$32.38

$42.48

108.54%

$33.98

Seagate Technology plc

(NASDAQ:STX)

$21.48

$86.25

$39.25

$32.52

$36.19

$48.55

126.04%

$38.84

$37.72

75.61%

$30.18

Sunoco LP

(NYSE:SUN)

$33.77

$0.04

$4.92

$48.52

$24.50

$19.50

-42.27%

$15.60

$14.71

-56.44%

$11.77

Standex International Inc.

(NYSE:SXI)

$85.41

$79.06

$77.28

$95.83

$88.72

$85.22

-0.22%

$68.18

$83.89

-1.78%

$67.11

Stock Yards Bancorp Inc.

(NASDAQ:SYBT)

$42.69

$36.87

$32.78

$51.00

$45.21

$41.47

-2.87%

$33.17

$41.04

-3.87%

$32.83

Medallion Financial Corp.

(TAXI)

$7.71

-

-

-

-

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Territorial Bancorp

(NASDAQ:TBNK)

$26.62

$20.35

$24.76

$31.16

$25.07

$25.34

-4.83%

$20.27

$24.92

-6.40%

$19.93

Triangle Capital Corp.

(NYSE:TCAP)

$18.37

$36.35

$47.06

$20.20

$21.90

$31.38

70.81%

$25.10

$29.13

58.55%

$23.30

Bio-Techne Corp.

(NASDAQ:TECH)

$107.10

$59.24

$105.90

$103.28

$74.01

$85.61

-20.07%

$68.49

$88.65

-17.23%

$70.92

TE Connectivity Ltd.

(NYSE:TEL)

$59.03

$156.99

$60.72

$125.45

$91.75

$108.73

84.19%

$86.98

$108.60

83.97%

$86.88

Tredegar Corp.

(NYSE:TG)

$15.97

-$17.70

$9.37

-$2.52

$5.25

-$1.40

-108.77%

-$1.12

$1.37

-91.45%

$1.09

Thor Industries Inc.

(NYSE:THO)

$64.28

$62.91

$58.69

$86.76

$76.61

$71.24

10.83%

$56.99

$69.76

8.53%

$55.81

Interface Inc.

(NASDAQ:TILE)

$16.67

$17.05

$21.12

$19.55

$29.04

$21.69

30.11%

$17.35

$20.34

21.99%

$16.27

Tesoro Logistics LP

(NYSE:TLLP)

$48.25

$34.28

$69.34

$60.59

$46.19

$52.60

9.02%

$42.08

$53.39

10.65%

$42.71

Targa Resources Corp.

(NYSE:TRGP)

$43.94

-$12.88

$21.10

$49.65

-$0.26

$14.40

-67.22%

$11.52

$10.42

-76.29%

$8.34

Trinity Industries Inc.

(NYSE:TRN)

$18.06

$83.00

$25.78

$35.73

$37.93

$45.61

152.55%

$36.49

$36.83

103.93%

$29.46

Terreno Realty Corp.

(NYSE:TRNO)

$23.74

-$2.81

$21.75

$15.14

$13.55

$11.91

-49.84%

$9.53

$14.35

-39.57%

$11.48

Tractor Supply Company

(NASDAQ:TSCO)

$95.12

$69.94

$91.68

$122.33

$79.44

$90.85

-4.49%

$72.68

$85.56

-10.05%

$68.45

Toro Company

(NYSE:TTC)

$88.54

$64.30

$74.14

$105.08

$79.00

$80.63

-8.93%

$64.50

$76.57

-13.52%

$61.26

Tupperware Brands Corp.

(NYSE:TUP)

$55.69

$58.78

$55.99

$74.19

$81.26

$67.56

21.31%

$54.04

$66.49

19.38%

$53.19

Time Warner Inc.

(NYSE:TWX)

$73.36

$85.51

$76.60

$89.78

$109.14

$90.26

23.03%

$72.21

$87.65

19.47%

$70.12

Texas Roadhouse Inc.

(NASDAQ:TXRH)

$44.23

$33.42

$38.06

$52.53

$40.53

$41.14

-7.00%

$32.91

$39.30

-11.16%

$31.44

Trinity Bank NA

(OTCPK:TYBT)

$48.95

-

-

-

-

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Tyco International Ltd.

(NYSE:TYC)

$42.69

$23.32

$34.91

$38.97

$40.55

$34.44

-19.33%

$27.55

$36.94

-13.47%

$29.55

Monotype Imaging Holdings Inc.

(NASDAQ:TYPE)

$23.77

$17.49

$26.90

$26.17

$25.11

$23.92

0.62%

$19.13

$25.64

7.87%

$20.51

United Bancshares Inc.

(NASDAQ:UBOH)

$18.23

$14.54

$18.09

$22.93

-

$18.52

1.59%

$14.82

$18.09

-0.77%

$14.47

Union Bankshares Corp.

(NASDAQ:UBSH)

$26.68

$10.93

$23.69

$29.42

$26.25

$22.57

-15.40%

$18.06

$24.97

-6.41%

$19.98

UDR Inc.

(NYSE:UDR)

$36.18

$11.04

$33.39

$557.74

$25.43

$156.90

333.67%

$125.52

$29.41

-18.71%

$23.53

Domtar Corp.

(NYSE:UFS)

$38.29

$21.49

$36.18

$39.28

$26.69

$30.91

-19.27%

$24.73

$31.44

-17.90%

$25.15

Umpqua Holdings Corp.

(NASDAQ:UMPQ)

$15.94

$13.48

$14.86

$19.78

$19.97

$17.02

6.79%

$13.62

$17.32

8.66%

$13.86

UnitedHealth Group Inc.

(NYSE:UNH)

$133.42

$137.82

$142.31

$137.02

$169.50

$146.66

9.93%

$117.33

$140.07

4.98%

$112.05

Unum Group

(NYSE:UNM)

$36.52

$260.17

$250.66

$46.64

$55.76

$153.31

319.79%

$122.65

$153.21

319.52%

$122.57

Union Pacific

(NYSE:UNP)

$82.91

$86.87

$86.98

$112.52

$88.40

$93.69

13.01%

$74.95

$87.69

5.77%

$70.15

United Parcel Service Inc.

(NYSE:UPS)

$102.30

$86.76

$104.32

$119.23

$101.29

$102.90

0.59%

$82.32

$102.81

0.49%

$82.24

U.S. Bancorp

(NYSE:USB)

$42.96

$20.22

$45.50

$47.86

$47.88

$40.37

-6.04%

$32.29

$46.68

8.66%

$37.34

US Physical Therapy Inc.

(NASDAQ:USPH)

$57.47

$34.11

$46.11

$63.75

$42.33

$46.58

-18.96%

$37.26

$44.22

-23.06%

$35.38

Visa Inc.

(NYSE:V)

$79.06

$72.96

$70.68

$98.92

$68.25

$77.70

-1.72%

$62.16

$71.82

-9.16%

$57.46

Viacom Inc. B

(NASDAQ:VIAB)

$41.99

-

-

-

-

#DIV/0!

#DIV/0!

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#NUM!

Valero Energy Corp.

(NYSE:VLO)

$54.62

$107.72

$40.18

$124.40

$76.87

$87.29

59.82%

$69.83

$92.30

68.98%

$73.84

Ventas Inc.

(NYSE:VTR)

$66.01

-$7.18

$68.35

$67.61

$44.89

$43.42

-34.23%

$34.73

$56.25

-14.79%

$45.00

Westinghouse Air Brake Technologies Corp.

(NYSE:WAB)

$78.22

$89.92

$85.14

$94.32

$94.10

$90.87

16.17%

$72.70

$92.01

17.63%

$73.61

Washington Federal Inc.

(NASDAQ:WAFD)

$25.13

$29.78

$25.37

$27.47

$30.13

$28.19

12.17%

$22.55

$28.63

13.91%

$22.90

Washington Trust Bancorp Inc.

(NASDAQ:WASH)

$38.30

$34.52

$37.92

$52.16

$40.59

$41.30

7.83%

$33.04

$39.26

2.49%

$31.40

Wayne Savings Bancshares Inc.

(NASDAQ:WAYN)

$12.51

$3.10

$10.83

$14.82

-

$9.58

-23.39%

$7.67

$10.83

-13.43%

$8.66

Webster Financial Corp.

(NYSE:WBS)

$38.95

-

-

-

-

#DIV/0!

#DIV/0!

#DIV/0!

#NUM!

#NUM!

#NUM!

Waste Connections Inc.

(NYSE:WCN)

$67.61

-$23.28

-$112.82

-$0.40

$38.60

-$24.48

-136.20%

-$19.58

-$11.84

-117.51%

-$9.47

WD-40 Company

(NASDAQ:WDFC)

$110.44

$58.37

$73.29

$130.09

$58.35

$80.03

-27.54%

$64.02

$65.83

-40.39%

$52.66

Waddell & Reed Financial Inc.

(NYSE:WDR)

$21.22

$30.66

$28.79

$40.14

$31.91

$32.88

54.92%

$26.30

$31.29

47.43%

$25.03

Wendy's Company

(NYSE:WEN)

$10.37

$11.46

$10.40

$11.22

$9.16

$10.56

1.83%

$8.45

$10.81

4.24%

$8.65

Western Gas Partners LP

(NYSE:WES)

$52.54

-$14.33

$38.31

-$1,807.30

$26.70

-$439.16

-935.85%

-$351.32

$6.19

-88.23%

$4.95

Wells Fargo & Co.

(NYSE:WFC)

$50.50

$28.86

$51.53

$62.67

$67.71

$52.69

4.34%

$42.15

$57.10

13.07%

$45.68

Whole Foods Market Inc.

(NASDAQ:WFM)

$32.06

$24.19

$39.66

$37.02

$24.09

$31.24

-2.56%

$24.99

$30.61

-4.54%

$24.48

Whirlpool Corp.

(NYSE:WHR)

$174.39

$186.14

$153.17

$202.54

$355.48

$224.33

28.64%

$179.47

$194.34

11.44%

$155.47

Winmark Corp.

(NASDAQ:WINA)

$97.04

$47.18

$105.02

$104.40

$12.55

$67.29

-30.66%

$53.83

$75.79

-21.90%

$60.63

Willis Towers Watson plc

(NASDAQ:WLTW)

$126.46

$32.67

$79.92

$121.49

$144.05

$94.53

-25.25%

$75.63

$100.71

-20.37%

$80.56

William Penn Bancorp Inc.

(OTCPK:WMPN)

$22.00

$23.26

$14.76

-

-

$19.01

-13.59%

$15.21

$19.01

-13.59%

$15.21

Worthington Industries Inc.

(NYSE:WOR)

$36.68

$23.46

$44.74

$41.63

$43.16

$38.25

4.27%

$30.60

$42.40

15.58%

$33.92

WPP plc

(NASDAQ:WPPGY)

$116.82

-

-

-

-

#DIV/0!

#DIV/0!

#DIV/0!

#NUM!

#NUM!

#NUM!

Williams Partners LP new

(NYSE:WPZ)

$31.67

-$55.46

$64.13

-$26.81

$8.72

-$2.36

-107.44%

-$1.88

-$9.05

-128.56%

-$7.24

Weingarten Realty Investors

(NYSE:WRI)

$37.09

$7.11

$33.25

$47.42

$29.24

$29.26

-21.12%

$23.40

$31.25

-15.76%

$25.00

WestRock Company

(NYSE:WRK)

$39.40

$12.77

$40.22

$1.05

$58.05

$28.02

-28.88%

$22.42

$26.50

-32.75%

$21.20

WesBanco Inc.

(NASDAQ:WSBC)

$32.83

$26.90

$31.08

$41.35

$39.07

$34.60

5.39%

$27.68

$35.08

6.84%

$28.06

West Bancorp Inc.

(NASDAQ:WTBA)

$18.67

$10.68

$18.09

$25.35

$9.85

$15.99

-14.34%

$12.79

$14.39

-22.95%

$11.51

Weyerhaeuser Company

(NYSE:WY)

$31.45

$6.74

$25.36

$38.04

$13.75

$20.97

-33.31%

$16.78

$19.56

-37.82%

$15.64

Wyndham Worldwide Corp.

(NYSE:WYN)

$67.52

$101.79

$128.67

$82.39

$110.15

$105.75

56.62%

$84.60

$105.97

56.95%

$84.78

Dentsply Sirona Inc.

(NASDAQ:XRAY)

$61.77

$20.74

$33.33

$68.30

$52.70

$43.77

-29.14%

$35.01

$43.02

-30.36%

$34.41

Xylem Inc.

(NYSE:XYL)

$44.72

$33.87

$38.29

$50.23

$38.26

$40.16

-10.19%

$32.13

$38.28

-14.41%

$30.62

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 43 companies that have an average and median margin of safety above 0%.
  • Of the 43 companies, 13 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 5 companies with insufficient data to complete all of the valuation models (TAXI, TYBT, VIAB, WBS, WPPGY)
  • There were 4 companies with insufficient data to complete 1 or 2 of the valuation models (SOMC, UBOH, WAYN, WMPN)

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.

TRINITY INDUSTRIES INC.

TRN fair value Click to enlarge

Trinity Industries, Inc. engages in the provision of products and services to the energy, transportation, chemical, and construction sectors. It operates through the following segments: Rail Group, Construction Products Group, Inland Barge Group, Energy Equipment Group and Railcar Leasing and Management Services Group.

TRN has an average margin of safety or potential upside of 152.6% which represents an average fair value of $45.61. The median margin of safety however or potential upside is lower at 103.9% which represents a median margin of safety of $36.83. Based on TRN's cash flows, the DCF values the stock price at $83.00 which is 4.5x its current price. The EBIT valuation estimates that there is some equity value based on the operating income, but it does not value the stock price of TRN as high as the Absolute PE or the Graham valuation models which estimate that the stock could double from the current price.

TRN has a current dividend yield of 2.43% and a payout ratio of 9.1%. This shows that TRN could expand its dividend payments considerably which the company had done. The 1 (20.0%), 3 (28.1%) and 5 (21.3%) year dividend growth rates are impressive however the last dividend raise of 10% on May 4, 2015 was likely a disappointment. TRN is also a former champion. It has now raised its dividend for 5 consecutive years.

TRN announced last month that it received a $940M order for wind towers. This is about the only bit of good news coming from TRN for its many business segments. Its primary segment is railcars. Orders for railcars continue to be weak due to the weakness in oil and gas and natural resources. The Association of American Railroads reported that rail traffic was down 6% in the first 12 weeks of this year and down 16.5% from the same period last year. This has led to two downgrades by Stifel and Axiom this year. The stock price of TRN fell over 25% in February after the company reported a weak 2016 outlook. TRN estimated that FY 2016 EPS would now be $2.00-$2.40 which is well below the $3.65 analyst consensus estimate at the time. TRN stated that it expects the current weak mark conditions to continue throughout 2016. The company stated that it is expecting fewer new orders for railcars and barges and as a result the company will focus on containing costs. In November, the U.S. Department of Transportation maintained its new rules to require the installation of expensive new brakes on trains hauling hazardous flammable materials. The rules along with tougher tank car standards will be phased in over several years. This may be beneficial for TRN who may receive increased orders for new tank cars however if the costs of the new tankers are too expensive, fewer orders may be received or TRN may be required to offer incentives.

TRN has had several years of excellent quality as per the Piotroski F Score. From 2012 to 2013, the company scored 9s which was a major improvement from the 4 to 5 the company was scoring for the 3 previous years. The company's long term debt to assets ratio decreased in 2014 compared to 2013. During that same period the company issued new shares. Both issues were resolved in 2015 however the asset turnover ratio decreased compared to 2014. The company continues however to be within the ideal range from 7-9 and is on the verge of being a 9 once more which makes TRN an interesting stock to consider in terms of fundamentals. Considering some of the 2016 headwinds mentioned above, it is obvious that the qualitative due diligence will be increasingly important in order to determine whether there will eventually be a fundamental/quantitative breakdown. The last remaining improvement the company needs to make to reach a 9 is to improve upon its asset turnover.

TRN Piotroski F Score Click to enlarge

TE CONNECTIVITY LTD.

TEL fair value Click to enlarge

TE Connectivity Ltd. engages in the design and manufacture of connectivity and sensors solutions. It operates through the following segments: Transportation Solutions, Industrial Solutions, and Network Solutions. The Transportation Solutions segment offers products that are used in the automotive, commercial transportation, and sensors markets. The Industrial Solutions segment provides products that connect and distribute power, data, and signal. The Network Solutions segment supplies electronic components for the data and devices and appliances markets.

TEL has an estimated average fair value of $108.73 representing an average margin of safety of 84.2%. The estimated median fair value is nearly identical at $108.60 for a median margin of safety of 84.0%. The DCF estimates that the stock price can more than double from its current level ($156.99) while the EBIT valuation estimates that TEL is already fairly valued ($60.72). These estimates provide quite a range while the Absolute PE and Graham valuations fall in the middle. One way to interpret this is that the future cash flow potential is high according to the DCF however there remains no additional equity value based on the current operating income of the company according to the EBIT.

TEL has a current dividend yield of 2.48% and a payout ratio of 27.8%. The company raised its dividend by 12.1% on May 12, 2016 which represents 6 consecutive years that it has raised its dividend. This last raise came in slightly lower than the 1 (14.3%), 3 (16.5%) and 5 (14.9%) year dividend growth rates. Back in March 2016, the company also announced that it was adding $1B to its buyback program. TEL had already spent $1.25B on common stock repurchases in FQ1. This demonstrates the company is returning value to shareholders.

TEL has been on an M&A spree. The company recently acquired Creganna Medical Group for $895M. Creganna provides delivery/access devices for medical device OEMs. It is likely that TEL used the recent $350M debt offering to pay for this acquisition. The company expects that this acquisition will provide a $0.03 of EPS accretion in the first full fiscal year after the deal's closing. The purpose is to expand the company's leadership position in harsh environment applications. TEL also acquired AdvancedCath (advanced catheter systems maker), Measurement Specialities (industrial sensor maker), AST (proprietary sensor maker for high performance, harsh and extreme environments) and Seacon Group (underwater electrical connectors maker) in recent years. These last acquisitions continued to gain momentum according to the CEO in FQ1 earnings announcement. The company guided slightly above analysts' consensus estimates for FY16.

TEL receives very little coverage by SA contributors so here are a few valuation ratios to show why the company is worth investigating. The company has generally had since 2009 continued growth and strength. The company has been considered a free cash flow machine for the past two years generating over 10% in FCF/S. The company has doubled its ROE since 2009 (31.9%) and now stands at an impressive 68.3%. Since 2011 when ROA dropped considerably (40.1% to 9.4%), the company has increased its efficiency in the use of its assets to generate returns for investors (2015 = 19.7%). Both the ROIC (2015 = 29.6%) and CROIC (2015 = 30.2%) show that the company's return to investors has been increasing with every dollar it invests each year. These are all indicators of a strong well managed company.

TEL valuation ratios Click to enlarge

SEAGATE TECHNOLOGY PLC

STX fair value Click to enlarge

Seagate Technology Plc engages in the provision of electronic data storage technologies and solutions. Its products and services include network attached storage, high performance computing, data protection appliances, internal hard drives, backup and recovery services, flash storage, and related solutions.

STX has an average fair value of $48.55 which represents an average margin of safety of 126.0%. The median fair value is $37.72 which represents a median margin of safety of 75.6%. Based on the company's cash flows, the DCF estimates that the stock could rise 4x its current price to $86.25. The other valuation models however appear to have some range of consensus in the $30.00 range. A closer look at STX's cash flows and future prospects would be prudent to determine whether the DCF estimate is valid or not.

STX has a dividend yield of 10.22% and a payout ratio of 228.6% which indicate that the dividend may have some issues in the future. The dividend was last raised by 16.7% on October 21, 2015. This marked the fifth consecutive year of dividend increases. The increase was fairly in line with the 1 (16.7%), 3 (18.4%) and 5 (20.3%) year dividend growth rates.

I won't go into great detail about the issues with STX because I believe that many investors are well aware of the issues facing the company. In brief, the company is experiencing decreasing sales due to the weakness in orders for new PCs. Furthermore, the company's HDD market is being reduced by the growing adoption of SDD's and other flash storage drives. Western Digital (NYSE:WDC) has also gained market share at the expense of STX and appears well positioned as it has diversified its product offerings with its recent acquisition of SanDisk.

The bigger question on investors mind is whether STX will cut its dividend. I wrote an article regarding my observations of 5 points that have occurred prior to a company cutting its dividend. The five points were:

  1. High dividend yield above the company's usual average over a long period of time
  2. Management addressing the issue of the sustainability of their dividend
  3. A growing number of articles on SA questioning the sustainability of the dividend
  4. Analysts tend to be the last ones to warn about a dividend cut before it happens
  5. The sector the company is in is under pressure

First, let's take a look at the dividend yield. The following Y-Chart shows that the dividend has increased considerably in the latter half of 2015 and into 2016. The 5 year dividend yield average is 3.87%. The yield is definitely considerably higher than its average and it has been above that average for at least 6 months. This qualifies for the first point.

Click to enlarge

The second point is management addressing the issue of the sustainability of their dividend. At this point, management has not done so.

There have been a growing number of contributors on SA writing that a dividend cut is likely. These articles include ones from Jason Kaplan and Kumquat Research while others weight in on the possibilities but issue no definitive position of whether the dividend will be cut or not. This qualifies for the third point.

No analysts have issued a warning about a dividend cut.

The sector the company is in is under pressure. Continued declines in orders and shipments, a weak PC market continue to plague STX and WDC however the IDC believes that PC shipments will stabilize in 2016. This qualified for the fifth point.

STX has paid $566M in dividends in the FY2016. Based on the company's quarterly financial statements, the net income the company generates is insufficient to cover the dividend however STX does have $1.2B in cash on hand at the end of Q3 however their cash is shrinking. The operating and free cash flow can cover the dividend however, the operating cash flow generated in Q3 barely covered the dividend and the free cash flow in Q3 was insufficient to cover the dividend. The trend in these matters continue to decline which is bearish for the future. Based on this information, I believe that it is likely that STX will use its cash position to cover the dividend for Q4. I believe the company may increase its dividend but nowhere near its previous growth rates. I see an increase likely being in the 1-2% range much like Walmart (NYSE:WMT) and Procter and Gamble (NYSE:PG). I believe that if the PC market does not stabilize in 2016 as the IDC predicts, STX will cut its dividend in 2017. I also believe that if a dividend cut is announced this year it will be in July when they announce Q4 and year end results and issue guidance for 2017. Q4 will be the telling tale in my mind.

In Millions

Q1 (2015-10)

Q2 (2016-01)

Q3 (2016-04)

Total

Dividends Paid

$190

$188

$188

$566

Net Income

$34

$165

-$21

$178

Cash and Cash Equivalents

$1915

$1258

$1193

-

Operating Cash Flows

$824

$382

$205

$1411

Free Cash Flow

$615

$245

$110

$970

Click to enlarge

STEELCASE INC.

SCS fair value Click to enlarge

Steelcase, Inc. offers furnishing solutions that addresses the three core elements of an office environment: interior architecture, furniture and technology. Its brands includes Steelcase, Coalesse, Details, Designtex, Nurture, PolyVision and Turnstone. These brands are focused on the office furniture segment and also extend their capabilities to serve needs in areas, such as healthcare, education and distributed work

SCS has an attractive average margin of safety of 39.8% and a median margin of safety of 39.5%. The average fair value estimate is $21.89 while the median fair value estimate is $21.85. Although the average and the median are practically the same, the valuation models differ considerably. The EBIT valuation finds that SCS is already fairly valued while the Graham valuation estimates a potential upside of 78.5%. A closer look at the company's financials, estimates for the coming year and analyst's estimates might help shed some light on which of these models more accurately estimates its fair value.

The current yield is 2.99% and a payout ratio of 33.1%. SCS raised its dividend by 6.7% back on March 22, 2016. The dividend increases have been decelerating as evidenced by the 1 (7.1%), 3 (10.3%), and 5 (22.6%) year dividend growth rates. The company has now raised its dividend for 6 consecutive years.

SCS receives little coverage on SA from contributors, analyst's coverage and news announcements. The valuation ratios once again help tell a story about this company. The company has had three very difficult years which were 2009, 2010 and 2015. Many of the valuation ratios went negative during these years. Furthermore, in these years free cash flows were severely affected. For dividend growth investors, this is a concern. SCS is not a cash flow generating machine and has struggled to maintain any momentum with its free cash flow generation (2015 = -0.4%). The company also had a negative free cash flow in 2015 (-$13.3M). These indicators suggest that future dividend raises may be challenging. When looking at these figures and the comparing looking at a price chart, you can see why the company has literally been static and even trades below its IPO price at the moment. Essentially, the company has not returned much to investors since the beginning except in dividends. This inconsistency may also be an indication of the current management team's abilities. On a positive note, the company did improve its valuation following the three difficult years with ROE exceeding 20% in 2016 and the ROIC reaching 16.4% in 2016 which are 10 year highs for both.

SCS valuation ratios Click to enlarge

Click to enlarge

WYNDHAM WORLDWIDE CORP.

WYN fair value Click to enlarge

Wyndham Worldwide Corp. offers individual consumers and business customers a broad array of hospitality services and products across various accommodation alternatives through its portfolio of brands. It operates through three business segments: Hotel Group, Destination Network, and Vacation Ownership.

WYN has an average fair value of $105.75 representing a potential upside of 56.6% while the median fair value if nearly identical at $105.97 representing a potential upside of 57.0%. Once again, the valuation models have considerably different fair value estimates but all see some potential upside. The EBIT valuation however estimates that the stock could double from its current price suggesting that it finds lots of equity value based on the company's operating income.

WYN dividend yield currently stands at 2.96% with a payout ratio of 35.1%. The last dividend increase occurred on February 25, 2016 with a generous 19.0% increase. This marked the 7 consecutive annual dividend increase for the company. Although it was a generous increase, the dividend raises have been slowly decelerating as seen when comparing the 1 (20.0%), 3 (22.2%) and 5 (28.5%) year dividend growth rates.

The biggest news affecting WYN at the moment is the regulatory order issued against and subsequent investigation launched by the Consumer Financial Protection Services [CFPB] into privately owned Westgate Resorts. This investigation will review and have an impact on timeshare practices. Timeshares are one of three parts of WYN's business. The effects of this investigation have impacted not only WYN's stock price but also its competitors as it will bring a certain scrutiny to the industry, and an interest by media outlets to investigate the lodging sectors selling tactics and practices. A more positive event that can have some benefit to WYN is the recent termination of embargoes against Cuba by the United States. Also contributing some positive momentum for WYN is the announcement by Priceline (NASDAQ:PCLN) in February where it reported an increase of 12.7% in gross travel bookings and an increase of 15.9% in international bookings. Barron's also noted that since the bottom of the financial crisis, WYN has returned 60% annually which ranks third among all stocks on the S&P 500 (NYSEARCA:SPY).

Despite the company's impressive returns since the bottom of the financial crisis and the generous dividend payouts, WYN has rarely reached a Piotroski F Score where the quality and strength of the company was ranked as great (score 7-9). The company has spent most of the past 10 years in the acceptable range (5-6). One of the major areas of concern is the long term debt to assets. This can be seen with an increasing debt/equity ratio that has risen from 1.28 in 2010 to 5.48 in 2015. This usually means that a company has been aggressive in financing growth with debt. The company on the other hand has reduced its shares outstanding for the past 5 years.

WYN Piotroski F Score Click to enlarge

CONCLUSION

This brings to a conclusion the series on evaluating the fair value of the Dividend Champions, Contenders and Challengers list. In total, there 64 out of 418 dividend challengers that had an average and a median fair value greater than 25%. This represents that only 15.3% of the dividend challengers had this margin of safety. This was better than the dividend contenders where only 32 out 247 (12.9%) had a margin of safety great than 25% and the dividend champions which only had 6 out of 107 (5.6%) with this margin of safety.

Not all of the companies with a margin of safety over 25% were great investment choices. Some did not provide a sufficient dividend yield, dividend growth or both. Many of the companies faced difficulties in their sector or industry which lead to pessimism in the stock price but in some cases the company's fundamentals also justified this pessimism.

This exercise has provided some opportunities to investigate some companies by completing some due diligence. Some of the stocks I covered in this series were added to my watch list. The key to remember is what Warren Buffett said:

Price is what you pay, value is what you get

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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: Nothing in this article should be construed as a recommendation to buy, sell or short any equities mentioned.

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.