D4L-Cheap Dividend Stocks
These are the days that value and dividend investors long for. There have been times in the past where I struggled to find stocks worthy of purchasing. Now, the challenge is to pick the best available stocks that will maximize my chances of future success.
When looking for value priced stocks, the Price-To-Book (P/B) ratio is one that I like to focus on. It is calculated as share price divided by book value per share. Book value is most often calculated as Assets less Liabilities. However, some people conservatively calculate book value as Assets less Intangibles less Liabilities. I prefer the latter since it excludes goodwill and other intangibles which would be difficult to recover in a liquidation.
A low P/B ratio could indicate a stock is undervalued. Since GAAP accounting is mostly based on historical cost, a viable growing company will normally be worth more than its book value. However, there are times when good companies will be punished along with the bad. It is our job as investors to separate the good companies from those that have fundamental problems.
Fortunately, online stock screens make searching through a large number of companies quite simple. This MSN stock screen will identify companies in the S&P 500 with a P/B less than 1 and a dividend yield >3% (MSN screen will likely only work in Internet Explorer):
Criteria:
- S&p 500 Member
- Price/Book <= 1 - Current Dividend Yield >= 3%
The screen produced 21 stocks on 8/3/2008 when I ran it. Some such as Fannie Mae (FNM) were obvious stocks with fundamental problems and not worthy of additional evaluation. Here are 8 familiar names I pulled from the list:
Company (Symbol), Price/Book, Yield
CBS (CBS), 0.50, 6.76%
Lehman Brothers (LEH), 0.53, 3.65%
Capital One Financial (COF), 0.63, 3.61%
American Capital (ACAS), 0.72, 20.35%
Cincinnati Financial Corp (CINF), 0.83, 5.61%
Amer International Group (AIG) 0.84, 3.29%
SunTrust Banks (STI), 0.85, 7.33%
NiSource Inc (NI), 0.91, 5.49%
This screen is not a buy list, but something to be used to identify stocks that could potentially be a value play. Remember, when stocks go on sale, it is only a good deal when the value you receive is greater than the price you pay!
Disclosure: Author is long ACAS and STI.
1) Their investments can be worth far less than book value. If the investments are privately issued CDOs rated by a monoline insurer the real value is probably less than 50% of book (think Merril Lynch). Even if the investments consist of Fanny and Freddie paper, you can"t be sure what they are really worth.
2) The loans can be worth far less than book value. Theoretically, management has to disclose the amount of non performing loans, but you can't trust them to be honest here. It's common knowledge that a bank is in serious trouble when the ratio of non performing assets (i.e non performing loans plus OREO) to total loans exceeds 3 per cent - and managment will do almost anything to make sure they don't exceed that ratio.
3) The exposure to losses from off balance sheet arrangements - (i.e "conduits" or ABCP facilities) is not reflected on the balance sheet. The larger banks can billions of dollars worth of unrecognized exposure. You have to review the 10K to get even a hint of the bank's exposure here.
ACAS doesn't have these issues, but I don't think they can be trusted to value their investments honestly and they have lost control of their salary expenses. They are probably the last BDC (except maybe for ALD) I would own. If you have to own a BDC, ARCC, AINV, and GLAD are probably safer investments.
FYI I have no positions (long or short) in any of these companies.
concisetrading.blogspo.../
Ryan
Evidently hedge funds agree as we have an enjoyable short covering rally going
The model predicts the stock's price in three month's time based on selected comp0any fundamentals and change in interest rates. The model does not include major upswings (current market) or downswings (recent history) or any of the risk factors which would be listed in a company's annual report. Not withstanding these exclusions, the mathematical model works quite well as any investor who reads this blog can determine by comparing the prices of these stocks on the evaluation date to the price three months later. Well - not quite. Sometimes the predicted price is attained in six weeks and sometimes as long as five months.
Here are the three month results of the mathematical model based on an initial evaluation date of August 6, 2008.
CBS Corp: $16.70 up to $19.14
Lehman Brothers: $20.46 up to $24.10
Capital One Financial: $45.01 with a negligible change to $45.79
American Capital: $22.54 up to $26.08
To rate these stocks there are three winners and one loser. From my personal perspective American Capital is a winner based on dividend alone. The other stocks would be passed over in favor of stocks with greater potential for appreciation.
To rate the price/book screen as a tool for selecting stocks without the advantage of the above described mathematical model, a realistic evaluation would require the comparison of prices over a period of time.
Skipjack
Disclosure: Author is long ACAS
My comment regarding the questionable valuation of ACAS investments was based upon analysis of the 2007 10K and is no longer correct.
I should have reviewed the 1Q 10Q wherein ACAS booked $997 Million in unrealized depreciation. The 2nd Quarter earnings announcement (released subsequent to my comment) booked an additional $264 Million in unrealized depreciation.
This means that ACAS may incur $1261 billion in realized losses over the life of these investments. No one knows what % of the unrealized losses will be realized ,or how many quarters these losses will be allocated to. But it would not be unreasable to assume that realized losses will amount to $150 Million per year for the 2009 to 2111 time period.
For 2008, the company is on target to make about $600 Million in net investment income and to pay shareholders $800 Million in dividends - a deficit of $200 Million.
So, my primary concern about ACAS is no longer improperly valued assests, but rather whether they can pay the current level of dividends after 2008. Obviously, the market has already priced in some decline in dividend payouts.
BTW I reaffirm the previous comment regarding out of control salary expenses. Salary expenses tripled (from $86M to to $254M) between 2005 and 2007 and Wilkus pulled down $24M in 2007. This is far more money than the CEO of any comparably sized regional bank would make. For reference, the CEO of Bank of America (which has about 140 times more assets than ACAS) made only $17M in 2007.