High Yield + High Growth + Dividend Champions = Purchase Candidate January Update

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Includes: ADP, CLX, CVX, EV, HP, JNJ, KO, MCD, MMM, PEP, XOM
by: DGI Guy

Summary

Lowell Miller’s book The Single Best Investment offers a simple equation for success.

Cross-referencing the CCC Dividend Champion list produces a few purchase candidates.

Based on the January list, there were three new additions – EV, ADP and MMM.

Introduction

In December, I started a series of articles (here) based on a recent reading of Lowell Miller's book the Single Best Investment (here). I was reminded of his classic equation that you can see quite often on Seeking Alpha. He writes, "High yield + high growth + high quality = high total returns." High-yield and high-growth, can be identified quickly by looking at historic data. To make the exercise manageable and relevant to retirement readers, I started with the CCC dividend champion list as my base of stocks.

Instead of trying to pick a specific yield or specific growth rate I want to identify the top quadrant of the group. For those of you that have a threshold for these numbers, it is just as easy to replace the median with your values. To do this I have loosely defined Best as higher than the median of the group. This is easy for yield as it is just one point in time, but for growth there are various time periods. To make sure that I was not biased to any time period, I chose to look at both the five-year and ten-year growth rates.

Visualization

To visualize this, I prepared a scatterplot of the two metrics. Below on the x-axis you will see the 10-year growth rate; on the Y axis you will see the current yield. Each axis has a line that indicates the median of the metric. For this work I am interested in the upper right-hand quadrant that is colored in red unlabeled target quadrant. As you can see on the chart the majority of stocks do not qualify for our target quadrant.

While the CCC Champions list has over 100 stocks on it currently, only 11 were selected via this methodology. 5 companies were dropped from the list from December to January CCC list while 3 were added.

Chart 1: Current Yield and 10-Year Growth Rate Scatter Plot

The List

Below is the list of the 11 stocks that appear in the target quadrant as well as some quick facts from FAST graphs.

Table 1: List of Stocks Selected with S&P Credit Ratings and Debt/Cap Metrics

Ticker

Name

S&P Credit Rating

Debt / Cap

Dec List

MMM

3M Company

AA-

22%

No

ADP

Automatic Data Proc.

AA

0%

No

CVX

Chevron Corp.

AA

10%

Yes

CLX

Clorox Company

BBB+

66%

Yes

KO

Coca-Cola Company

AA

26%

Yes

EV

Eaton Vance Corp.

A-

48%

No

XOM

ExxonMobil Corp.

AAA

6%

Yes

HP

Helmerich & Payne Inc.

n/a

1%

Yes

JNJ

Johnson & Johnson

AAA

14%

Yes

MCD

McDonald's Corp.

A

50%

Yes

PEP

PepsiCo Inc.

A

41%

Yes

Source: FAST Graphs

MO, TGT and PG are honorable mentions to the list. I have pulled them off due to their payout ratios being greater than 70%. Two others fell off the list based on their dividend growth relative to the medians.

Table 2: List of Stocks on December List not on January List

Ticket

Name

S&P Credit Rating

Debt / Cap

AFL

AFLAC Inc.

A

13%

WEYS

Weyco Group Inc.

N/A

0%

Table 3: Quick Facts from FAST Graphs.

Source: FAST Graphs

Yield and Payout Ratios

The entire portfolio yields 3.00%. This is down from the 3.11% in the December portfolio.

Table 4: Yield and Payout Ratios

Ticker

Name

Yield

Payout Ratio

MMM

3M Company

2.50

56.32

ADP

Automatic Data Proc.

2.35

61.64

CVX

Chevron Corp.

3.82

39.41

CLX

Clorox Company

2.84

68.36

KO

Coca-Cola Company

2.89

67.78

EV

Eaton Vance Corp.

2.44

39.53

XOM

ExxonMobil Corp.

2.99

34.72

HP

Helmerich & Payne Inc.

4.08

42.64

JNJ

Johnson & Johnson

2.68

46.36

MCD

McDonald's Corp.

3.63

66.80

PEP

PepsiCo Inc.

2.77

57.96

Valuation

As with all stock decisions we need to take a look at current valuation first historical average. This will make sure that we do not pay a premium to own the shares. Taking a look at our list of 11 there appears to only be two options that are fair valued. Two additional stocks trade within 10% of their historic P/E average. I am a stickler for valuation and I would not be willing to overpay for any of these companies but some of you may be more interested in doing so.

Table 5: Valuation of selected stocks

Ticker

Name

10 Year P/E Avg

Current P/E

% Premium / Discount

MMM

3M Company

16.1

21.2

-24%

ADP

Automatic Data Proc.

22.1

27.2

-19%

CVX

Chevron Corp.

9.4

11.1

-15%

CLX

Clorox Company

18.3

23.6

-22%

KO

Coca-Cola Company

18.5

20.9

-11%

EV

Eaton Vance Corp.

20.5

15.4

33%

XOM

ExxonMobil Corp.

11.6

12.2

-5%

HP

Helmerich & Payne Inc.

12.1

10.4

16%

JNJ

Johnson & Johnson

14.5

17.3

-16%

MCD

McDonald's Corp.

17.3

18.5

-6%

PEP

PepsiCo Inc.

17.8

20.2

-12%

I will now do a quick rundown on the three new stocks to the list.

3M

The following description is from Thomson Reuters StockReport: "3M Company is a diversified technology company. The Company's business segments: Industrial, which serves a range of markets, such as automotive original equipment manufacturer (OEM) and automotive aftermarket, electronics, appliance, paper and printing, packaging, food and beverage, and construction; Safety and Graphics, which serves a range of markets for the safety, security and productivity of people, facilities and systems; Electronics and Energy, which serves customers in electronics and energy markets, including solutions for electronic devices, telecommunications networks, electrical products, power generation and distribution, and infrastructure protection; Health Care, which serves markets that include medical clinics and hospitals, pharmaceuticals, dental and orthodontic practitioners, and health information systems, among others, and Consumer, which serves markets that include consumer retail, office retail, home improvement, building maintenance and other markets."

3M has done a great job growing EPS over the previous ten years. This has translated into some good growth in the dividend. The 2.2% yield is not the highest. The payout ratio is pretty low which makes me think that the dividend is safe. With growth expected in the mid-single digits for the next few years it is hard to justify the P/E at 21. I would wait for a pullback before purchasing this solid Champion.

Chart 2: MMM Fast Graph

Source: FAST Graphs

Automatic Data Processing

The following description is from Thomson Reuters StockReport: "Automatic Data Processing, Inc. is a provider of human capital management solutions to employers and computing solutions to vehicle dealers. ADP operates through three business segments: Employer Services, Professional Employer Organization (NYSE:PEO) Services and Dealer Services."

This is another one that is just way too far overpriced. The 27.2 P/E is above its premium historic 10 year P/E of 22.1. Even with the rock star 0% debt/cap, AA Credit Rating and 5% growth this one is on hold for me until we get a better price from Mr. Market.

Chart 3: ADP FAST Graph

Source: FAST Graphs

Eaton Vance

The following description is from Thomson Reuters StockReport: "Eaton Vance Corp. is engaged in managing investment funds and providing investment management and advisory services to high-net-worth individuals and institutions. The Company focuses to develop and sustain management expertise across a range of investment disciplines and to offer investment products and services through multiple distribution channels. It conducts its investment management business through its wholly owned affiliates: Eaton Vance Management (NYSEMKT:EVM), Boston Management and Research (NYSE:BMR), Eaton Vance Investment Counsel (EVIC), Eaton Vance (Ireland) Limited (OTCPK:EVAI) and Eaton Vance Trust Company (NYSE:EVTC)."

This is the only one of the three new stocks on the list that is fairly valued. That being said, be prepared; the beta on this bad boy is hard to stomach. It is expected to grow earnings to 2.92 by 2016. That is a 17% premium to 2014 EPS of 2.48. This one is floating well below its historic P/E. I would think additional research is warranted to someone looking for a financial services stock. The 2.6% yield is appetizing compared to other Champions like BEN (Dividend 1.1%).

Chart 4: EV FAST Graph

Source: FAST Graphs

Conclusion

Reviewing the CCC list for Lowell Miller's equation provides 13 companies that appear interesting from a research perspective on my original work back in December. The January list added three new stocks to the list and removed a couple others. Each of the additions has its own story worth reviewing. EV appears to be the best research candidate that is near a fair value estimate for price.

Disclosure: The author is long XOM.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author has no positions in any other stocks mentioned, but may initiate a long position on any other stock listed in the next 72 hours.