DGI 2015 Candidate Buy List - Industrials Sector

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Includes: ABB, ALFVY, AVX, BAESY, CAT, E, EMR, ETN, GE, LMT, RSG, TRTN
by: Earl Setser
Summary

12 Industrials Sector stocks from the DGI 2015 Candidate List are rated for stock quality.

The Top 7 stocks are selected as purchase candidates for 2015 and beyond.

Present valuation is evaluated for the final candidates.

Background

I've recently posted several articles involving generation of a dividend growth candidate list for 2015. The first articles presented a screening process and the final results are found here. My first sector review was energy and can be found here. This article will investigate the Industrials Sector. This series of articles will take the logical next step to rate each of the candidates for stock quality in order to reduce the list to the very best candidates. The original candidate list presented was organized by sector and I plan to review each sector one by one over the next few months.

Screening and Rating Process

I've provided the details for the screening steps in the first two articles, and more detailed descriptions of the rating process in the Energy Sector article. So refer to those articles for further information if you are interested. The following table is a summary of the rating process and how I weight various stock characteristics to achieve an overall quality rating.

Rating Parameter Groups and Allocations

Group

Parameters

Points

Performance

EPS, Revenue

18

Stability

ROE, Debt/Equity, Credit Rating, Beta

22

Future

5 yr EPS estimate, Moat, Analyst Rating(s)

20

Income Specific

Years increased, 1 & 3 year DGR, yield

30

Business

Story - judgment on company overall

10

Total

100

After I complete the rating, I sort by the quality rating value, and make a selection of the top candidates. After the sort is complete, I do a quick valuation check for the stocks. I have listed notes below the table on how I determined parameters.

Industrial Sector

Here are the Industrials Sector candidates from the end of the year candidate list. There are 12 candidates from the early January screen. Note this is a copy of the previously posted table, so the data reflects end of December data.

Industrials Sector Candidates

Company Name Ticker Symbol Industry Div. Yield Credit Rating DGR 1-yr DGR 3-yr Sector
ABB Limited ABB Machinery 3.73 A 8.9 4.9 Industrials
Alfa Laval AB ALFVY Industrial Equipment 2.98 BBB+ 6.5 6.3 Industrials
AVX Corp. AVX Electronics 3.00 MR 1 11.4 17.6 Industrials
BAE Systems plc BAESY Aerospace/Defense 4.54 BBB+ 7.2 4.6 Industrials
Caterpillar Inc. CAT Industrial Equipment 3.06 A 11.1 13.0 Industrials
Deere & Company DE Farm Equipment 2.71 A 11.6 13.5 Industrials
Eaton Corp. plc ETN Machinery 2.88 BBB+ 16.7 13.0 Industrials
Emerson Electric EMR Industrial Equipment 3.05 A 6.0 7.0 Industrials
General Electric Co. GE Conglomerate 3.64 AA+ 15.8 14.9 Industrials
Lockheed Martin LMT Aerospace/Defense 3.12 A- 14.9 19.1 Industrials
Republic Services Inc. RSG Waste Management 2.78 BBB+ 9.8 8.9 Industrials
TAL International Group Inc. TAL Rental/Leasing Services 6.61 MR 3 7.5 13.1 Industrials

Notes:

  • In the charts above, you may see MR # under credit rating. If there is no credit rating for a stock, I look up the stock in Moody's to see if there is a Real Time Credit Risk Score. These scores range from 1-10, with 1 being highest quality and 10 being lowest. I have included only stocks that are rated 1, 2, or 3 in the initial candidate list screen. However, I have given extra points to stocks with normal credit ratings of BBB- or better in the rating. So the Quality Score does take into account this lower rating.
  • Industry group in the chart above is from SA Contributor David Fish's CCC list found here.
  • The yield in this table is based on 12/31/14 yield values from the CCC list.

Candidate List Ratings - Industrials Sector

In the table below are the quality ratings for the stocks from above. Note that I have broken the total quality rating into 2 components for transparency. The number rating is the sum of the first 4 groups listed above, and is strictly numerical. The story rating is a score from 0-10 based on my read of the business, how it operates, the goals, the future, etc. This is just an opinion, but this is where I get to impact the rating with some personal thoughts/impressions. Basically, I research each company to get a feel about the business. A negative rating (by me) would disqualify the company (for my purchase). I include these two ratings separately so anyone who desires can update the story rating per personal review or adjust either rating for that matter. In fact, you should consider the story rating as a "due diligence" assignment and provide your own value. In the end, I use the total quality rating as the key selector to pick the final candidate list.

The blank row near the middle of the table represents my cutoff for the final list. The stocks above the row make it in the Final Candidate List for 2015, and the stocks below do not. I want to let the ratings select the best overall stocks. I don't have a specific rating or number to pick the cutoff, so it will vary somewhat from sector to sector. Given 130 stocks total to start, I would like to end up with 50-80 final stocks at the end of the review. For the Industrials Sector, a logical cutoff could have been made either before or after General Electric. I decided to make the cut after and that means GE makes the final candidate list.

Industrials Sector - Quality Rating

Company Ticker Price Proj Yield Sub-Industry Quality Rating Story Rating Total Rating
Lockheed Martin Corp LMT 188.37 3.19 Aerospace & Defense 44 10 54
Eaton Corp PLC ETN 63.09 3.05 Electronic Components & Equip 43 10 53
TAL International Group TAL 40.65 7.08 Trading Companies & Distributors 48 3 51
Emerson Electric Co EMR 56.94 3.31 Electronic Components & Equip 39 9 48
Deere & Co DE 85.19 2.79 Agricultural & Farm Machinery 41 7 48
Caterpillar Inc CAT 79.97 3.50 Construction Machinery 43 5 48
General Electric GE 23.89 3.85 Industrial Conglomerates 33 6 39
Stocks above this line make the Final List, stocks below do not
ABB Limited ABB 19.14 3.96 Heavy Electrical Equipment 34 DQ 34
AVX Corp AVX 12.93 3.20 Electronic Components & Equip 26 NR 26
Republic Services Inc RSG 39.68 2.82 Environmental & Facilities Services 22 NR 22
BAE Systems PLC ADR BAESY 30.35 4.11 Aerospace & Defense 17 NR 17
Alfa Laval AB ADR ALFVY 18.05 2.38 Industrial Machinery DQ NR 0

Notes:

  • The ratings were completed with data parameters gathered in the last week (1/31/15).
  • The price and projected yield are current as of 1/30/15.
  • Proj Yield is the Morningstar "Projected Yield." This represents the yield assuming that the latest dividend amount is maintained. This is a forward looking yield value. I like it for this evaluation because it more closely reflects the actual future yield (if all goes well).
  • Total quality rating is the sum of the number (numeric) rating and the story rating.
  • Industry group above is from the MSCI Global Industry Classification Standards (GICS).
  • Story ratings were not completed on stocks with very low number ratings, and are noted as NR for Not Rated. This was done strictly as a time saver, but these stocks would not have made the cut anyway.

Note that both ALFVY and ABB show DQ in the table above. I removed ALFVY from consideration because the present yield is 2.38%, below my 2.7% cutoff. I disqualified ABB from consideration due to the Swiss ADR tax withholding complications. For multiple reasons, I don't feel it's in my best interest to invest in these stocks. You can review ABB further if your situation is different. Maybe I should consider adding criteria for that to my screen?

For the final candidates, I take the next step to review the current valuation of the stock. These valuations are based on prices at the close on 1/30/15. Valuation is a parameter that can change quickly, so I recommend you perform your own valuation prior to any decision or purchase, as the values can change quickly with price moves as well as news on stock performance. In all cases, you should do your own due diligence before making any purchase decision on any stock!

Industrials Sector - Stocks Final Candidates

Company Ticker Price Quality Rating Story Rating Total Rating FAST FV Rating MStar FV Rating S&P IQ FV Rating Overall FV Rating
Lockheed Martin Corp LMT 188.37 44 10 54

Poor

Poor

Poor
Eaton Corp PLC ETN 63.09 43 10 53

Fair

Fair Fair
TAL International Group TAL 40.65 48 3 51

Exc

Poor Fair+
Emerson Electric Co EMR 56.94 39 9 48 Fair Good Fair+
Deere & Co DE 85.19 41 7 48 Exc Fair Good
Caterpillar Inc CAT 79.97 43 5 48 Good Fair Fair+
General Electric GE 23.89 33 6 39 Fair Good Fair+

Notes:

  • The fair value rating was estimated with data current as of 1/30/15.
  • I try to use an average of 2 fair value estimates for my overall rating. If the average is between ratings, I indicate the lower rating followed by a "+" sign.
  • I source some of my information using SA Contributor Chuck Carnevale's FAST graphs found here.
  • My preferred inputs are the FAST fair value rating and the Morningstar fair value rating.
  • The FAST fair value uses a 15xX P/E valuation except for high growth stocks where it uses the growth rate as the factor.
  • I use the S&P fair value rank from the Capital IQ Stock Report as the replacement if needed to provide a 2nd valuation. This is available under research for my brokerage account.
  • In the case of only one fair value input, I just use that valuation.
  • The ratings are noted below.
  • For cases where the average falls between ratings, I include the colors that surround the average rating.

Fair Value Rating Key

Rating

Morningstar & S&P IQ Ratings

Fast Ratings

Excellent

5 points/stars

>3 bands or 30% under estimated fair value

Good

4 points/stars

1-3 bands or 10-30% under estimated fair value

Fair

3 points/stars

+/- one band or +/-10% of fair value

Poor

2 points/stars

1-3 bands over or 10-30% over estimated fair value

Bubble

1 point/star

>3 bands over or 30% over estimated fair value

Summary/Conclusions - Industrials Sector

So that is 2 sectors down on my quest to general a diversified DGI Candidate List for 2015. In this article, I started with 12 stocks. I used the quality rating to select the 7 highest rated stocks for the final candidate list. I will continue to evaluate the remainder of the December candidate list of 130 stocks on a sector by sector basis to arrive at a final list. The goal is to establish a list of high quality dividend growth stocks for possible purchase throughout 2015 and a start to the list for 2016. After the first 2 sectors, I have 21 stocks on the 2015 Candidate List, but much work left to do!

Thanks for reading and please feel free to ask any questions or provide any comments/suggestions you have. Good luck in your future investing.

Disclosure: The author is long ETN. 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 plans to initiate any new positions in any stocks mentioned in the next 72 hours.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.