Finding Some Of The Best-Quality Dividend Growth Stocks Using The Piotroski F Score

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Includes: AAPL, ADP, APD, BDX, CAH, CAT, CL, CLX, CMI, COP, COST, CSCO, CVX, DE, DIS, EMR, GE, GILD, GIS, GPC, HAS, HCP, HD, HSY, IBM, ITW, JNJ, KMB, KMI, KO, LMT, LOW, LYB, MCD, MDT, MKC, MMM, MO, MSFT, NSC, O, OHI, PEP, PG, PM, PSX, QCOM, SBUX, SJM, SO, SPY, T, TGT, UTX, V, VLO, VZ, WBA, WEC, WFC, WMT, XOM
by: Accelerating Dividends

Summary

The Piotroski F Score measures the quality of a company.

A sample of some of the more popular dividend growth stocks were analyzed using the Piotroski F Score.

Only one stock was found to have a perfect score. 20 companies in total scored in the excellent range.

There are some limitations that the Piotroski F Score cannot predict which are discussed such as dividend cuts, dividend raises or tracking stock prices.

INTRODUCTION

I like the Piotroski F Score for multiple reasons. One is because there have been plenty of academic papers written on it. The results have also been back tested and proven worthy. The whole scoring system is based on accounting and fundamentals. This gives you an insight into the quality of the company, management's effectiveness, and the strength of the company's financial position which is important for dividend growth investors. Furthermore, the Piotroski score is used to determine the best value stocks helping you identify the best company. This method is also downside protection. In 2008 when the S&P 500 (NYSEARCA:SPY) shed nearly 40%, the American Association of Individual Investors found only one stock strategy with positive returns that same year. You guessed it! It was the Piotroski F-Score.

Most people know what the Piotroski consists of but here are the 9 points of criteria just in case:

Profitability

  • Positive return on assets in the current year
  • Positive operating cash flow in the current year
  • Higher return on assets (ROA) in the current period compared to the ROA in the previous year
  • Cash flow from operations are greater than ROA

Leverage, Liquidity and Source of Funds

  • Lower ratio of long term debt to in the current period compared value in the previous year
  • Higher current ratio this year compared to the previous year
  • No new shares were issued in the last year

Operating Efficiency

  • A higher gross margin compared to the previous year
  • A higher asset turnover ratio compared to the previous year

For every criterion that is met the company is given one point. If the criterion is not met, then no points are awarded. The points are then added up to determine the best value stocks. A Piotroski Score between 7-9 is excellent. A score between 4-6 is common. Stable companies typically have a score between 5-6 according to Forbes Magazine. A score between 0-3 is a negative sign.

I should note that according to the original paper, the Piotroski F Score is best used to identify small and medium market cap companies. This is because the returns are greater with these stocks when value can be identified. Such value tends to disappear quickly with large cap stocks because of the amount of analyst coverage. This does not mean that the Piotroski F Score does not work for large cap stocks. It only means that these companies will not necessarily produce outsized returns.

The following table presents 61 commonly held dividend growth stocks with the Piotroski F Score for the past 9 years along with the twelve trailing months. I have color coded the F scores based on their value in this Google Spreadsheet to make it easier to see. The sheet can be accessed here. Green are for scores between 7-9, yellow for scores between 4-6 and red for scores between 0-3.

Company

Ticker

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

TTM

3M

(NYSE:MMM)

5

6

4

7

7

8

5

7

8

6

7

IBM

(NYSE:IBM)

6

7

7

8

8

8

6

6

6

5

6

Wisconsin Energy

(NYSE:WEC)

6

7

5

7

7

8

7

8

7

6

7

Kinder Morgan

(NYSE:KMI)

-

6

7

3

6

7

5

5

5

5

5

Qualcomm

(NASDAQ:QCOM)

6

7

7

5

6

7

6

7

7

4

5

Lockheed Martin

(NYSE:LMT)

6

9

6

5

5

6

6

7

7

5

5

Apple

(NASDAQ:AAPL)

6

8

8

7

6

7

6

5

5

8

5

Becton Dickinson and Comp.

(NYSE:BDX)

6

8

8

5

6

6

5

7

5

4

6

Caterpillar

(NYSE:CAT)

6

6

6

7

9

5

6

4

6

6

5

United Technologies

(NYSE:UTX)

6

6

5

6

8

9

4

7

9

4

6

Coca-Cola

(NYSE:KO)

6

5

7

6

3

5

6

6

6

6

6

McCormick

(NYSE:MKC)

6

6

5

7

7

5

6

7

7

5

7

Target

(NYSE:TGT)

6

6

6

8

7

6

6

5

6

8

7

Omega Healthcare

(NYSE:OHI)

5

8

6

6

6

6

7

8

7

7

6

General Mills

(NYSE:GIS)

7

8

7

7

8

7

4

6

4

4

8

PepsiCo

(NYSE:PEP)

5

5

4

8

5

5

5

7

6

7

6

Johnson & Johnson

(NYSE:JNJ)

6

6

7

6

6

5

5

6

7

5

5

Wells Fargo

(NYSE:WFC)

5

7

3

8

7

7

8

6

5

5

5

Genuine Parts Company

(NYSE:GPC)

5

7

6

6

7

7

7

5

5

6

6

Exxon Mobil

(NYSE:XOM)

6

5

7

5

5

6

6

5

4

5

6

Colgate-Palmolive

(NYSE:CL)

6

8

7

8

6

6

6

6

6

6

7

Kimberly-Clark

(NYSE:KMB)

6

8

4

8

4

5

6

7

6

6

8

General Electric

(NYSE:GE)

6

8

5

3

7

9

6

6

7

8

7

Realty Income

(NYSE:O)

4

6

5

6

6

6

4

6

6

6

5

Clorox

(NYSE:CLX)

6

7

6

7

7

6

7

6

7

7

9

HCP

(NYSE:HCP)

5

8

7

6

8

6

6

6

6

5

7

Southern Company

(NYSE:SO)

6

6

5

5

6

7

5

4

6

6

5

Procter & Gamble

(NYSE:PG)

6

7

8

5

8

6

6

8

6

6

8

AT&T

(NYSE:T)

6

6

6

6

7

5

6

7

6

5

6

Automatic Data Processing

(NASDAQ:ADP)

6

8

8

8

6

6

7

5

8

8

6

Wal-Mart

(NYSE:WMT)

6

6

8

7

6

4

6

5

9

5

7

ConocoPhillips

(NYSE:COP)

6

5

5

5

8

6

7

7

4

3

4

Smucker

(NYSE:SJM)

6

7

6

6

7

4

5

8

7

6

6

Hershey

(NYSE:HSY)

6

5

8

7

8

5

7

7

4

5

5

Walgreens Boots

(NASDAQ:WBA)

6

6

5

5

6

8

5

7

5

5

5

Altria

(NYSE:MO)

6

7

9

5

6

5

7

7

5

8

7

Deere

(NYSE:DE)

5

8

6

5

7

6

5

6

5

5

6

Verizon

(NYSE:VZ)

6

8

6

6

5

6

5

7

3

6

7

Philip Morris

(NYSE:PM)

4

6

6

6

8

7

6

5

5

7

5

McDonald's

(NYSE:MCD)

6

7

8

5

7

6

5

6

4

6

7

Visa

(NYSE:V)

5

5

6

7

8

8

6

7

8

8

5

Starbucks

(NASDAQ:SBUX)

6

5

6

7

8

6

5

6

5

7

6

Emerson Electric

(NYSE:EMR)

6

8

8

3

5

7

6

7

7

5

6

Chevron

(NYSE:CVX)

6

7

7

6

7

7

5

4

5

6

5

Microsoft

(NASDAQ:MSFT)

6

7

8

5

7

6

5

6

4

4

5

Air Products and Chemicals

(NYSE:APD)

6

8

8

8

6

6

7

5

8

8

6

Illinois Tool Works

(NYSE:ITW)

6

7

5

5

7

7

6

6

6

8

8

Medtronic

(NYSE:MDT)

5

7

7

7

7

5

7

5

5

4

5

Cardinal Health

(NYSE:CAH)

6

5

7

7

6

7

7

5

6

6

5

Costco Wholesale

(NASDAQ:COST)

6

7

8

7

8

6

5

7

6

6

7

Cummins

(NYSE:CMI)

6

6

7

5

6

9

6

5

7

6

5

Hasbro

(NASDAQ:HAS)

6

8

7

6

5

6

7

5

8

9

6

Norfolk Southern

(NYSE:NSC)

6

6

7

6

7

6

6

8

8

5

7

LyondellBasell Industries

(NYSE:LYB)

-

-

3

5

6

7

7

7

6

7

7

Gilead

(NASDAQ:GILD)

4

7

6

6

3

5

4

5

8

6

6

Valero Energy

(NYSE:VLO)

6

5

5

3

7

6

8

6

8

7

6

Lowe's

(NYSE:LOW)

-

-

6

7

7

8

5

6

7

2

6

Cisco

(NASDAQ:CSCO)

6

8

7

5

6

5

7

7

5

8

7

Disney

(NYSE:DIS)

6

7

8

5

7

7

7

6

7

8

6

Philips 66

(NYSE:PSX)

-

-

-

-

4

7

6

6

6

7

5

Home Depot

(NYSE:HD)

-

6

6

8

7

7

8

8

7

6

5

Here are a few observations from this sample of dividend growth stocks.

The Piotroski F Score may not predict a dividend cut.

There are two companies in this sample that recently cut dividends. They are KMI and COP. In the case of COP it may have been predicted as the F Score dropped from 7 in 2013 to 4 in 2014 to 3 in 2015. This could have been an early warning sign. On the other hand, KMI has scored a 5 every year since 2012 which score suggests a stable company.

The Piotroski F Score does not predict the size of future dividend increases.

The best example I can use here is WMT. WMT shocked the dividend growth community when it raised its dividend in 2014 by a little over 2%. WMT had a score of 5 that year. Maybe justified but the company had risen it much more over the past few years while the F score was more or less the same. Then in 2014 when WMT's F Score rose to 9 the company announced another 2% dividend increase. Again in 2015, the score now back to 5, WMT again increased the dividend by 2%. Similarly, PG rose its dividend by 3% in 2015 when its F Score was a 6 and even since it has risen to an 8 in the past TTM, PG raised the dividend by 1%.

Stock prices do not follow the Piotroski F Score.

What I mean by this is that even if the F score is slowly declining, the stock price is not necessarily following suit. Therefore, no one should make any rash selling decisions based on the F score trend. Take MSFT for example. The F score was once an 8 in 2008 and a 7 in 2010. In 2008 the stock tanked like all others. In 2010 despite a rising F score, the stock traded lower than in 2009 when it has a lower F score. Since 2010, the F score has dropped to a 4 and been stuck in a range between 4-5 for the past few years. But the stock has none the less climbed and reached new all-time highs, highs not seen since the dot-com era.

Now on to some analysis.

There are a total of 20 companies with an F Score that is between 7 and 9. None of the stocks have scores below 3. This does go to show that these companies are generally stable which is something dividend growth investors seek for to have peace of mind and sleep well at night.

There is only one company that currently has a score of 9 and that company is CLX.

For the last 10 years, CLX has scored a 6 or a 7. For the past few years, CLX has been inconsistent mostly with the long term debt vs. assets, current ratio, shares outstanding and gross margin. These four criteria remain the most fragile as the company has not been able to string consistent improvements unlike net income, operating cash flows, return on assets and quality of earnings. CLX could very well return to a 6 or 7 depending on how the following quarters progress or it could very well be the start of a new growth trend. The table below shows the 10-year history of the Piotroski F Scores.

CLX Piotroski F Score

CLX has a current dividend yield of 2.31% which is respectable given that the stock trades near its 52-week high. However, CLX released a disappointing dividend raise in May when it announced that the dividend increase was 3.9%. When compared to the 1-year (4.1%), 3-year (6.8%), 5-year (7.5%) and 10-year (10.4%) dividend growth rates, the size of this raise may have been expected given the current downward trend. With a low current yield and a negligible dividend increase, it makes the stock less desirable for those desiring to initiate a position. There is something to be said for quality, and part of that quality is the fact that CLX has raised its dividend for 38 years however the lack of income generated cannot be ignored either.

The stock was trading at $134.48 at the time of writing. This represents a P/E of 26.4 and trades. The stock is also trading at 25.8x 2017 earnings. Both of these are above the 5-year average P/E of 21.4. CLX's P/E is also near its all-time high of 28.2 as seen in the YChart below.

When looking at models that generate fair value estimates, there is only one that sees a potential upside of 12%. This is the Absolute P/E model. The other fair value estimates and their respective models can be found in the table below.

Model

Median Fair Value

Discount Cash Flow

$74.40

Graham's Valuation

$89.53

EBIT Valuation

$100.55

Absolute P/E

$152.36

The Absolute P/E model estimates that the fair value P/E for CLX is actually 29.8. This fits nearly perfectly with the analysts' estimates for next year's growth of 5.5%. But investors may not be paying much attention to analysts because at the current stock price, investors are expecting a growth rate of 16.1% based on a reverse DCF model.

Based on the valuation models, the P/E ratio and the stock price appreciation at a growth rate that is clearly not sustainable for this company, CLX appears severely overvalued at present.

There was one other company that scored a 9 in 2015 before the TTM reduced the score to a 6. This was the only other stock to recently score a 9 in the sample. That stock is HAS.

HAS Piotroski F Score

HAS was like most other usual stocks with a score between 5-6 with some peaks into the 7-8 range. In fact, if you look closely, you will see that the company has formed a wave dropping from an 8 in 2007 to 7, then 6 then 5 before climbing to a 6 then a 7 in 2012. HAS broke that mold by dropping to a 5 in 2013. This could be something telling because after that the stock rose to an 8 in 2014 and then a 9 in 2015. Since 2013, the stock has had a CAGR of 23.3%. The F Score dropped from 9 to 7 in the TTM due to the long term debt vs. assets and asset turnover. The recent quarterly report raised concerns about the slowdown in "boys toys" which led to the lower asset turnover this quarter. Subsequently the stock dropped over 6%.

The company over this time has had consistent and growing net income and operating cash flows. HAS also reduced its outstanding share count from 166.7M in 2006 to 125.0M in 2015 or by 25.0%. But the reason for the inconsistency in the other criteria is due to shifts in consumer demands. In 2007 when HAS reached a 7, Apple released the first iPhone. This lead to the modern era of mobile gaming and in accordance, HAS score slowly declined because of this new shift from traditional toys. But several hit movies from the Marvel Comics genre (for example) has reignited demand in its toys.

HAS currently trades at 21.7x earnings but is trading at 17.9x 2017 earnings estimates which forecasts an 11.9% earnings growth next year. The forward P/E is lower than the 5-year average of 18.7. The Absolute P/E suggests that HAS fair value P/E is actually 26.3x. This suggests that HAS is in or around fair value at the moment or may be undervalued based on next year's earnings growth.

Taking a quick look at the valuation models, it seems as though HAS is currently trading closer to the lower end of the fair value estimates in the low $70.00 range. The Graham valuation and Absolute P/E valuation see upside potential of 20% and 18% respectively.

Model

Median Fair Value

Discount Cash Flow

$70.21

Graham's Valuation

$101.58

EBIT Valuation

$73.65

Absolute P/E

$98.44

HAS current dividend yield is 2.51% and raised its dividend by 10.9% in April. Its 1-year (7.1%), 3-year (9.5%), 5-year (13.8%) and 10-year (18.6%) dividend growth rates are in decline but will rise due to this last announcement. The company has now paid a dividend for 13 consecutive years.

Based on this information, the more attractive dividend and the likelihood that HAS will rebound later in the next few quarters due to such catalysts as the release of the upcoming Star Wars movie, HAS appears to be a buy at the moment. I for one initiated a position at $78.94 when the stock dropped following earnings.

Now there are some other companies that are considered excellent. The companies currently scoring an 8 include GIS, KMB, PG and ITW. The companies currently scoring a 7 include CSCO, LYB, NSC, COST, MCD, VZ, MO, WMT, HCP, CL, TGT, MKC, WEC and MMM.

There are a few companies whose F score has been improving for at least two years. These stocks include XOM, VZ, and MCD. MCD and VZ recently announced earnings which showed some ongoing concerns. It will be interesting to see if the can overcome them over the next few quarters in order to maintain their F score momentum.

There are also a few companies whose F score has been regressing for at least two years. These stocks include EMR, CMI, VLO and HD. These to me would be watch closely stocks. VLO is likely tied with the decline in oil and is likely to rebound once oil rebounds. Home starts continue to be strong in the US which is a plus for companies like HD. This may be temporary weakness in an otherwise great company.

CONCLUSION

The Piotroski F Score can help investors evaluate the quality of a dividend growth company and uncover some of the company's weaknesses. This sample also demonstrated that other evaluations need to be done to identify quality in a company since the Piotroski F score found that very few of the companies in the sample scored in the excellent range. It would suggest that only some have excellent quality while others have typical quality, quality that is sufficient to grow and pay dividends to shareholders' year over year. It's also hard to ignore that nearly half the sample scored a 7-9 or excellent during the financial crisis. That alone is a great indication of quality.

Disclosure: I am/we are long LYB, HAS, OHI, GILD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.