'Safe' Contender Dogs: Too Big To Play, Too Small To Brag, Just Awkward

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Includes: AMNF, CCFN, GPS, IMASF, ISBA, MDP, NWFL, PBCT, QCOM, TCP, UBA, WHG
by: Fredrik Arnold

Summary

16 of 55 Dividend Contender (10-24 annual dividend hikes) stocks showed free cash flow yields greater than dividend yields as on 2/27/17. Those 16 were tagged "safe" with current cash to cover dividends.

Top 10 "safe" February Contender annual yields ranged from 3.44% to 6.29% from NWFL, PBCT, ISBA, GPS, AMNF, QCOM, WHG, UBA, IMASF, and TCP. Their cash flow yields ranged from 4.53% to 11.86%.

Besides safety margin, "safe" Contender stocks also reported payout ratios (lower is better), total annual returns, and dividend growth as of 2/27/17 to verify their financial prowess.

Matched against top ten Dow dogs, the "safe" Contender ten produced 19% more returns (from $1k invested in each) at 38% of the top ten Dow dog aggregate single share price.

Analyst 1-year targets revealed ten top "safe" Contender stocks forecasting 31.7% less net gain from $5k invested in the lowest-priced five than from $5K invested in all ten.

The Dividend Dogs Rule

The "dog" moniker was earned by stocks exhibiting three traits: (1) paying reliable, repeating dividends, (2) their prices fell to where (3) yield (dividend/price) grew higher than their peers. Thus, the highest-yielding stocks in any collection became known as "dogs." More specifically, these are, in fact, best called "underdogs."

February's "Safe" Contender Dogs

David Fish's Dividend Contenders listed as of 1/31/17 were paired with annual dividends and prices posted as of February 27, 2017, on YCharts. Results from that data charted below and screened for "safe" supporting cash flow yields showed the top ten by represented seven of eleven business sectors in the Morningstar scheme.

Which Sectors Carry The Most "Safe" Contenders?

Nine Morningstar sectors were represented by the full set of 16 firms whose dividends were bolstered by adequate cash as of February 27. The sector representation broke out thus: Energy (1); Communication Services (1); Real Estate (1); Financial Services (7); Technology (1); Consumer Defensive (1); Consumer Cyclical (2); Utilities (1); Industrials (1); Basic Materials (0); Healthcare (0).

Top ten "safe" Contender dogs showing a safety margin of cash to cover dividends by this screen as of February 27 represented the first five sectors on the list above.

16 Contender Firms Showed "Safe" Dividends

Periodic Safety Check

You see grouped below the list of 16 that passed the "safety" check with sufficient annual cash flow yield to cover their anticipated annual dividend yield. The margin of excess is shown in the boldfaced "Safety Margin" column.

Corporate financial strength is sadly managed by a sometimes malevolent, spendthrift, or tightwad board of directors promoting company policies cancelling or varying the payout of dividends to shareholders. This article asserts sustained cash flow is a strong invitation to instate and adhere to a dividend policy increased annually.

Three additional columns of financial data listed after the Safety Margin figures above reveal payout ratios (lower is better), total annual returns, and dividend growth levels for each stock. This data is provided to reach beyond yield to select reliable payout stocks. Positive results in all five columns after the dividend ratio is remarkable as a solid financial signal.

Dividend vs. Price Compared to Dow

Ten top "safe" Contender dividend dog stocks by yield as of 2/27/17 were compared to those of the Dow. Annual dividend amounts from $1000 invested in each of the ten highest-yielding stocks and their aggregate single share price created the data points shown in green for price and blue for dividends.

Actionable Conclusions: (1) Top Contender Dog Price Lags Dividend By 43%, While (2) Dow Dogs' Price Exceeds Dividend By 70%

"Safe" Contender dog aggregate single share price for top ten by yield was 43% under the dividend derived from $10k invested as $1k in each of the top ten stocks.

Meanwhile, Dow dogs' aggregate single share price for the top ten yielding dogs was 70% greater than the dividend derived from $10k invested as $1k in each of the top ten stocks.

As a result, the Challengers show better prospects for new buyers than the Dow exhibiting expensive and overbought conditions (where aggregate single share price of the ten exceeded projected annual dividend from $10k invested as $1k in each).

The Overbought Dow

As Dow dogs become more overbought and overpriced, they show themselves to be not only low-risk but especially low-opportunity dogs as well. The Dow top ten average price per dollar of annual dividend was $28.39 as on February 27.

In contrast to the Dow, "safe" Contender top ten average price per dollar of annual dividend was $23.04 as of 2/22/17. That's a price 19% less than the Dow price for a dollar of annual dividends.

To quantify top dog rankings, analyst median price target estimates provided a "market sentiment" gauge of upside potential. Added to the simple high yield "dog" metric, analyst mean price target estimates provided another tool to dig out bargains.

Actionable Conclusion (3): Wall St. Analysts Forecast a 3.45% 1-year Average Upside and 3.05% Net Gain from the Top 16 "Safe" Contender Stocks

Top dogs on the "safe" Contender stock list were graphed above to compare relative strengths by dividend and price as of February 27, 2017 with those projected by analyst mean price target estimates to the same date in 2018.

Historical prices and actual dividends paid from $10,000 invested as $1K in each of the ten highest-yielding stocks and the aggregate single share prices of those ten stocks created the data points applied to 2017. Projections based on estimated increases in dividend amounts from $1000 invested in the ten highest-yielding stocks and aggregate 1-year analyst mean target prices as reported by Yahoo Finance created the 2018 data points shown in blue for dividend and green for price. Note: 1-year target prices from one analyst were usually not applied (n/a).

Analysts projected a 0.5% lower dividend from $10K invested in "safe" Contender dogs, while their aggregate single share price was projected to increase by 0.25% in the coming year.

The number of analysts contributing to the mean target price estimate for each stock was noted in the next-to-the-last column on the above chart. Three to nine analysts were considered optimal for a valid projection estimate. Estimates provided by one analyst were usually not applied (n/a).

A beta (risk) ranking for each stock was provided in the far right column. A beta of 1 meant the stock's price would move with the market. Less than 1 showed lower-than-market movement. Higher than 1 showed greater-than-market movement. A negative beta number indicated the degree of a stock's price movement opposed to market direction.

Actionable Conclusion (4): Analysts Forecast Top Ten "Safe" Contender Dog Stocks to Net 2.4% to 13.3% Gains by February 2018

Nine of the ten top "safe" dividend Contender dogs (tinted gray in the chart above) were verified as being among the top ten gainers for the coming year based on dividends alone for six of the nine. Analyst 1-year target prices contributed to only three of the top net gains. Thus, the dog strategy for this group as graded by analyst estimates for February proved 90% accurate.

Ten probable profit generating trades as illustrated by YCharts analytics for 2018 were:

Qualcomm (NASDAQ:QCOM) netted $166.67 per estimates from twenty-seven analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 31% more than the market as a whole.

Urstadt Biddle Properties (NYSE:UBA) netted $65.76 based on estimates from five analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 37% less than the market as a whole.

Inmarsat (OTCPK:IMASF) netted $41.45 based on dividends alone less broker fees. No analysts targets counted. The Beta number showed this estimate subject to volatility 57% less than the market as a whole.

TC Pipelines (NYSE:TCP) netted $40.60 based on dividends, while overcoming a negative target price from ten analysts and subtracting broker fees. The Beta number showed this estimate subject to volatility 8% less than the market as a whole.

Westwood Holdings Group (NYSE:WHG) netted $20.80 based on dividends alone less broker fees. The Beta number showed this estimate subject to volatility 39% more than the market as a whole.

Gap (NYSE:GPS) netted $18.89 based on median target price targets from thirty-one analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 2% less than the market as a whole.

Armanino Foods (OTCPK:AMNF) netted $17.04 based on dividends less broker fees. The Beta number showed this estimate subject to volatility 99% less than the market as a whole

Isabella Bank (OTCQX:ISBA) netted $15.98 based on estimated dividends with broker fees subtracted. The Beta number showed this estimate subject to volatility 9% opposite the market as a whole.

Norwood Financial (NASDAQ:NWFL) netted $14.39 based on dividends less broker fees. The Beta number showed this estimate subject to volatility 96% less than the market as a whole.

CCFNB Bancorp (OTCPK:CCFN) netted $12.73 based on dividend less broker fees. The Beta number showed this estimate subject to volatility 8% opposite the market as a whole.

The average net gain in dividend and price was 4.14% on $1k invested in each of these ten "safe" Contender dogs. This gain estimate was subject to average volatility 45% less than the market as a whole.

Actionable Conclusion (5): (Bear Alert) Analysts Anticipated One "Safe" Contender Dog to Lose 4.57% by February 2018

One probable losing trade revealed by Thomson/First Call in Yahoo Finance for 2018 was:

Meredith (NYSE:MDP) projected a loss of $38.47 based on dividend and a median negative target price estimate from six analysts, including $20 of broker fees. The Beta number showed this estimate subject to volatility 13% more than the market as a whole.

Dog Metrics Found Losers in the Lowest-Priced "Safe" Dividend Dividend Contender Dogs

Ten "safe" Contender firms with the highest yields as of February 27 per YCharts data ranked themselves by yield as follows:

Actionable Conclusions: (6) Analysts Projected 5 Lowest-Priced of Ten "Safe" Dividend High Yield Dividend Contender Dogs to Deliver 2.68% Vs. (7) 3.92% Net Gains from All Ten by February 2018

$5000 invested as $1k in each of the five lowest-priced stocks in the "safe" ten Contender pack by yield were determined by analyst 1-year targets to deliver 31.7% less net gain than $5,000 invested as $.5k in all ten. The eighth lowest-priced safe dividend Contender dog, Qualcomm, showed the best net gain of 16.67% per analyst targets.

The five lowest-priced "safe" dividend Contender dogs as of February 27 were Armanino Foods, Inmarsat, People's United Financial (NASDAQ:PBCT), Urstadt Biddle Properties, and Gap, with prices ranging from $2.16 to $25.20.

Five higher-priced "safe" Dividend Contender dogs as of February 27 were Isabella Bank, Norwood Financial, Qualcomm, TC Pipelines, and Westwood Holdings Group, with prices ranging from $27.79 to $60.78.

This distinction between five low-priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow. The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a "here and now" equivalent of waiting a year to find out what might happen in the market. It's also the work analysts got paid big bucks to do.

Caution is advised, however, as analysts are historically 20-80% accurate on the direction of change and about 0-20% accurate on the degree of the change.

The net gain estimates mentioned above did not factor in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

See my instablog for specific instructions about how to best apply the Dividend dog data featured in this article and this instablog to aid your safe investing.

The stocks listed above were suggested only as possible starting points for your safe dividend Contender dog stock research process. These were not recommendations.

Three of the "non-safe" Contender Index dividend pups qualified as star catches! Find them among the now 52 Dogs of the Week (DOTW) I but not among 28 and growing DOTWII found on The Dividend Dog Catcher premium site. Click here to subscribe or get more information.

Root for the Underdog.

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.

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from www.ycharts. com; www.finance.yahoo.com; analyst mean target price by Thomson/First Call in Yahoo Finance. Dog photo from: martincity.wordpress.com.

Disclosure: I am/we are long VZ, PFE, GE, CSCO, intc.

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

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.