Barron's Low P/E Dividend Dogs Sport 25.73% Net Gains Next Year

by: Fredrik Arnold

First, what are Barron's Low P/E Dogs? Barron's, "The Dow Jones Business and Financial Weekly", published it's annual list of America's 500 top companies by sales in May. Barron's survey was prepared by HOLT, a segment of Credit Suisse which measured, graded, then ranked companies based on three measures collected from reports from the companies' latest reported fiscal year (mostly 2011):

  1. "Median three-year return on investment, based on a proprietary cash-flow metric called CFROI"
  2. "Change in CFROI in the latest fiscal year relative to the three-year median"
  3. "Sales growth in the latest fiscal year, adjusted for divestitures (and, in the case of cigarette companies, for taxes that are collected and remitted to the government)"

Given the measures, each company was graded in each of the three categories with those making the top one-fifth graded A, while those in the bottom one-fifth were graded F. HOLT thereby assigned grade point averages (GPA) for each company based on 4 for A down to 0 for F. Companies that restated financial data or operated under bankruptcy rules were excluded. A previous article described the top ten Barron's best by sales dogs that earned a GPA of 3.0 or above as "Barron's Top 10 US Sales Dogs".

Dogs of the Index Metrics Cull Out Current Low P/E Bargains

To identify companies with especially cheap shares, Barron's asked FactSet to re-rank the HOLT list by price/earnings ratio, based on profit estimates for the current fiscal year."Combing the Barron's 500 for Underpriced Shares" focused on the 30 components with the lowest P/Es.

For this article, 17 low P/E companies that pay dividends were re-ranked using the two key dog performance metrics: (1) stock price; (2) annual dividend. Dividing the annual dividend by the price declared the percentage yield by which each dog stock was ranked.

Historically, dividend dog investors utilized this ranking system to select portfolios of five or ten stocks in any one index, sector, or survey to trade. They awaited the results from their investments in the lowest priced, highest yielding stocks and prayed that the price of every stock they now owned climbed higher (having locked in a high yield percentage at purchase).

Seventeen low P/E stocks in the Barron's 500 Dividend Dogs listed below were ranked by yields calculated as of July 10. Bracketed numbers after the stock name indicate the rank earned in Barron's survey. Classic Dogs of the Index theory trades selected Dow stocks. Thus, the Dow is used as a standard of comparison to conclude this article.

Barron's Low P/E Dogs

Click to enlarge

Barron's Low P/E Dogs were narrowed to ten stocks showing the biggest dividend yields as of July 10. They included equities representing three of nine market sectors. The top stock as revealed by Yahoo Finance data, was one of three in the services sector, RR Donnelley & Sons (NASDAQ:RRD). The other two services firms were: Gannett (NYSE:GCI), and Best Buy (NYSE:BBY). The balance of the top ten included: three technology, Exells (NYSE:XLS); Seagate Technology (NASDAQ:STX), and Hewlett Packard (NYSE:HPQ) ; four financial firms, Aflac (NYSE:AFL), MetLife (NYSE:MET), Assurant (NYSE:AIZ) and Hartford Financial Services (NYSE:HIG) represented the sectors. Second, what about those gains?

Dividend vs. Price Results

Below relative strength for Barron's Low P/E Dogs was graphed by yield as of July 10, 2012. Seven months of historic projected annual dividend history from $1000 invested in the ten highest yielding stocks and the total single share prices of those ten stocks created the data points for each month shown in green for price and blue for dividends.

Conclusion: Barron's Top 10 Low P/E Dogs Turn Bullish

These Low P/E top ten dogs show more dividend potential at potentially higher risk than their brothers. (Some listed equities have struggled to sustain projected dividends. Supervalu (NYSE:SVU) is a notable example.) While Barron's best by sales dogs top ten showed aggregate share price diverging 45.55% above projected dividends from $1k invested in each of the ten, the Barron's Low P/E top ten dogs diverged 70.89%, but with dividends exceeding price.

The mostly bearish trend exhibited by Barron's best by sales dogs in dividend vs. price performance was not shown by the Low P/E top ten. A neutral signal flashed as aggregate single share price for the Low P/E top ten declined 1.88%, while projected dividends from those ten invested at $1k also declined 4% between January and July. A steep decline of 15.57%% between June and July reversed a previously bearish trend.

July aggregate single share stock price for the Barron's Low P/E top ten dogs lagged total annual dividend returns from $1k invested in each of those stocks by $160 or 41.56%. Compared to the Dow in July these Barron's Low P/E top ten dogs showed a 52.89% lower aggregate single share price chasing 4.14% lower dividends from $1k invested in each than promised by the dogs of the Dow.

Conclusion Too: Analysts Forecast Gains up to 25.73% as of July 2013

Top ten stocks on the Barron's Low P/E top ten dog list were graphed below to show relative strengths by dividend and price as of July 10, 2012 and those projected to July 10, 2013.

Historic prices and actual dividends paid from $1000 invested in the ten highest yielding stocks and the aggregate single share prices of those ten stocks created the data points for 2012. Projections based on estimated increases in dividend amounts from $1000 invested in the ten highest yielding stocks and aggregate one-year analyst mean target prices as reported by Yahoo Finance created the 2013 data points green for price and blue for dividends.

For the coming year, Yahoo Finance projected a 22.42% lower dividend from $1k invested in each stock within this group, while aggregate single share price for the ten was projected by analysts to increase by 29.29%. Probable profit generating trades one year from now revealed by Yahoo were RR Donnelley & Sons netting $549.01 based on mean target price set by 5 analysts, AFLAC netting $281.73, Hewlett Packard netting $458.81 based on mean target price set by 15 analysts, Met Life netting $554.94 based on mean target price set by 17 analysts, and Hartford Financial Services netting $286.16 based on mean target price set by 13 analysts. The resulting net gain from dividends and swept price gains was calculated at 25.73% from $10k invested according to analyst estimates for 2013.

Stay tuned also for Barron's Low P/E top ten dog comparisons to other dog lists, including Barron's best sales dogs. Look for semi-annual updates on how well or whether projected gains for 2013 hold.

Disclosure: I am long T, VZ, JNJ, INTC.

Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.