Quantitative Dividend Growth Rebalancing Selections

Includes: ES, RDS.A, RTN, RY, TGH, VGR
by: Tyson Halsey, CFA

Income Growth Advisors, LLC rebalanced its Quantitative Dividend Growth stock model on March 17, 2012. Our 14 stock portfolio had three buys and three sells. The three buys were Royal Bank of Canada (RY), Raytheon (RTN), and Textainer Group Holdings Limited (TGH). The three sells were North East Utilities (NU), Royal Dutch Shell (NYSE:RDS.A), and Vector Group Ltd. (VGR).

Since inception on March 31, 2001, our Quantitative Dividend Growth stock model portfolio has not had a down year (11 years), has had 12.9% annualized outperformance to the S&P 500 total return index (or 441% gross versus 49.8%), and currently yields 4.18%, before fees. Our model employs a macro market hedge which led us to cash in 2001-2003 and 2007-2009.


Royal Bank of Canada exited the U.S. mortgage market by agreeing to a $3.5 billion sale of its U.S. retail banking subsidiary to PNC Financial in June 2011. With the sale, RY maintains its position as one of the least leveraged companies in the diversified banking group, boasting an annualized 27% long term debt/equity ratio in the most recent quarter versus an industry average of 177%. RY maintains an $85 billion market capitalization, a P/E ratio of 13.9, and trailing twelve month earnings of $4.39 per share. RY has a solid balance sheet, intelligent banking practices, and should grow steadily as the global economy improves and unencumbered by having to pay back capital or shore up its reserves like many U.S. and European banks.

Raytheon is enjoying strength in their missile, air defense, radar systems, combat communications, and surveillance divisions. RTN recently reported a positive earnings surprise of $1.58 per share which was 17.6% above the consensus estimate of $1.34. This piggybacks two prior surprises to the upside, each with an increasing margin of outperformance against estimates. Raytheon's dividend grew 14.7% last year which exceeds the industry average of 5.5%. The dividend currently yields 3.8%. RTN appears attractively valued trading at a P/E of 9.9 with good earnings and business momentum.

Textainer Group Holdings Limited is a leading worldwide cargo container operator based out of Hamilton Bermuda. TGH has a $1.7 billion market capitalization, $3.2 billion enterprise value, and a 4.2% yield. TGH reported earnings on March 19th. Its revenues were $116 million up 38.5% and its earnings were up 30.8% at $1.06/share versus $0.81 a year earlier and 7% above the earnings consensus. At $35/share the stock is trading at 9 times trailing twelve months earnings. TGH is cyclical and enjoying a global economic recovery. TGH has raised its dividend every quarter for the last nine quarters.


Northeast Utilities was dropped with the sector rotation out of utilities after last year's sparking run in the utility sector. NU has appreciated nicely; however, fundamental and sentiment indicators show that it may be time to take profits. Negative revenue growth of -8.83% for the trailing twelve months versus the prior period sets off red flags for the near term outlook. Additionally, insider transactions for March 2012 include a couple million dollars worth of sales, contrasted with zero open market insider purchases year to date. A consensus analyst price target around $38.00 leaves little room for further upside momentum which the downside risk now appears to outweigh.

Royal Dutch Shell (RDS.A) was dropped due to weak performance relative to peers ExxonMobile (NYSE:XOM) and Chevron (NYSE:CVX). While RDS-A appears committed to steady dividend growth, a recent earnings miss and unattractive profitability metrics had it dropped from our model. A gross profit margin of 14.46% for the most recent quarter puts RDS-A in the lower 25th percentile compared to its peer group. In addition, return on equity of 18.81% and return on assets of 8.92% lag industry averages of 48.25% and 24.85% respectively. While Royal Dutch Shell is one of the largest integrated energy firms in the world, based on current fundamentals, there are more attractive alternatives in this space.

We dropped cigarette maker Vector Group due to flat operating and stock price performance. Vector is a diversified cigarette manufacturer with investments in real estate, drug, convenience and grocery chains. Its market capitalization is $1.41 billion and enterprise value is $1.63 billion. Its dividend 9.0% dividend has been flat for the last three years and the stock trades at a 19 times trailing earnings.

Our model is based on a multi-factor ranking system based on academic research that shows input factors with positive correlations to stock appreciation. Earnings and stock price are positively correlated. So we factor that in. Since a dividend cut is the death knell to income stocks, we choose earnings growth rates and time frames that would make a dividend cut improbable. We have studied and followed dividend growth portfolio managers who brilliantly analyzed a company, but then observed those stocks languish in flat or in down trends. So, stylistically, we apply technical parameters to deselect laggards. Our software was developed by consultants and programmers who worked for Driehaus and Citadel. Our model is not funded and is just a simulation. However, past experience with certain proprietary inputs give us comfort that we will continue to see good outperformance even in a rising rate environment.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TGH, RY, RTN over the next 72 hours.

Disclaimer: The information expressed in this note and on our website is based upon the interpretation of available data. The data being presented was obtained or derived from sources believed to be accurate, but Tyson Halsey, CFA and Income Growth Advisors, LLC cannot and does not guarantee the accuracy of these sources which may be incomplete and/or condensed. The data and information presented is provided for informational purposes only, and is not offered as a basis for trading in securities nor is it offered for that purpose. Readers and potential investors should conduct their own independent investigation before making any investment or business decisions with respect to Royal Bank of Canada , Raytheon , Textainer Group Holdings Limited , North East Utilities , Royal Dutch Shell (RDS-A) and Vector Group Ltd . or other securities presented on our website. Nothing contained herein should be construed as a recommendation to buy or sell any securities.

About this article:

Problem with this article? Please tell us. Disagree with this article? .