Every month SA contributor, Justin Law, publishes a list of companies which have raised, not just paid, dividends for 5, 10 and 25 years or more. They are respectively known as dividend champions, contenders and challengers, or the CCC list. The CCC list was originally published by David Fish and is presented in spreadsheet fashion.
The list is filled with over 50 specific identifying and performance metrics on each company and now totals close to 900 companies, including MLP's and REIT's, or about 800 companies without REITs and MLPs. You can find the latest list at The DRiP Investing Resource Center - Information, Tools, And Forms.
I believe all investors have different needs and their investment strategies reflect those needs. One of the most valuable strategy elements an investor can follow, no matter their needs, is to first confine their stock searches to only high-quality companies. Only then, should they perform filtering processes to identify companies with the characteristics which meet their wants and needs, i.e. valuation, yield, market cap, credit rating, sector, industry, etc. In this example, yield may be a need (to produce enough income on which to live), whereas size may be a want (to reflect a belief that bigger is safer (a belief I don't share)).
In 2013 I began reading and learning from SA articles and found David Fish's original CCC work. I realized that by using the metrics in David's spreadsheets I could develop and apply a formula to those metrics, which formula reflected my own beliefs about the relative importance of each metric and each company's then-current circumstances. In other words, applying my formula to a company's metrics could produce a "quality" measure, or score, to always guide the first step in my investment processes. I started sharing the results on SA in 2014, calling the process the Dugan Stock Scoring System (DSSS). I tweak the formula every 6 months to reflect new market realities and expectations.
My SA followers know the results of having used DSSS in 2014, '15, '16 and the first half of 2017 as handily beating the S&P 500, as I reported in in-time SA articles. I stopped writing about the DSSS in 2017 but have recently decided to get back to it.
Thus, DSSS is a tool to identify the overall quality of CCC companies.
I believe there is a strong correlation between Dugan Scores and the quality of individual stocks. Those companies' stocks earning high Dugan Scores are high quality stocks which should produce better investing results, going forward, than otherwise would be attained by simply filtering for desired characteristics.
In this context, highest quality means companies that have:
- STRONG CURRENT CONDITIONS, as exemplified by: great value as measured by relative Graham number, low payout ratio, low debt/equity ratio and high most recent dividend increase %.
- EXCELLENT FUTURE PROSPECTS, as exemplified by: high EPS growth forecasts for this year, next year and 5 years out, and excellent dividend growth histories.
The Dugan Stock Scoring System isn't a popularity contest. It is a disciplined, systematic and dispassionate approach that evaluates each CCC stock based on a wide variety of investment criteria from four broad categories: Risk, Value, Past Performance and Future Performance Expectations.
So, the purpose of the scoring system is to calculate the all-around quality of a stock before applying appropriate filters, before buying, holding or selling.
But no stocks, like no people, are perfect. Even high-quality and high-scoring stocks have weaknesses, the same as low-scoring and low-quality stocks have some strengths. So, a Dugan Score is a balanced, holistic picture of a stock, which includes its strengths and weaknesses.
You can see from the above explanations, the Dugan Stock Scoring System is about the current state and expected future performance of a company's stock, not necessarily the company itself. And it doesn't matter how well a stock has performed for its owners in the past - what only matters are the current conditions and expected future performance of the stock. This is an important point when an iconic stock makes a "worst" list.
The table below is a summary of the metrics used in the 2019 DSSS, along with each metric's relative weighting in the overall formula. The weightings are my assessment of each metric's relative importance in calculating the company's overall quality.
After calculating the Dugan Score, a small bonus, or penalty, is applied to the earned score for each CCC stock, based on four brokers'/analysts' recommendations for current sector weightings (Fidelity, S&P Capital IQ, Ned Davis and Lance Roberts). The base bonus or penalty calculation is simple: Market weight earns zero points, overweight earns 1 point, underweight earns minus 1 point, net/net from each of the 4 sources.
Hereafter are the 25 highest "Dugan Scoring" June 2019 CCC stocks with market caps greater than $15 billion and yield greater than 2.25%:
A SA reader could use the above list to begin the next level of due diligence and filter the list for other desired characteristics beyond market cap and yield. For anyone so inclined, I'll be happy to email the full excel spreadsheet, sorted by Dugan Score, and containing all the CCC metrics, for further study and filtering. Just message me here at SA to get on the list.
Hereafter are the 25 lowest "Dugan scoring" June 2019 CCC stocks, also filtered with market caps greater than $15 billion and yield greater than 2.25%:
A SA reader could use this list to question the appropriateness of holding a stock on the "lowest" list, by comparing any stock's individual metrics with the averages of the metrics for all the CCC companies and/or those scoring in the top 50% by Dugan Score. You might find some genuine surprises by so comparing.
Note that some companies in the lists have "n/a" in some columns. Whenever a company has an "n/a" in a cell, it receives zero points in the DSSS. The "n/a" could have been caused by a loss in eps resulting in an inability to calculate a metric in the spreadsheet. That is the primary reason for the appearance of some highly popular companies on the "Worst" list.
For comparison, here are the 25 highest-scoring June 2019 CCC companies with no filtering:
For perspective about any company on the lists, I always find it helpful to compare how well its performance in any column compares to the averages shown at the bottom of the table. Doing this will answer most questions about why a company may have achieved the Dugan Score it earned.
From about 1900 to about 2015 the market was in decline or catching back up to a previous high, in real terms, for 91 of the 115 years, or 79% of the time. It was in true rising mode for only 24 of the 115 years, or 21% of the time. See graph below. Thanks to Lance Roberts for the original graph.
I hope you found the information valuable and enjoyed this short journey. Comments are encouraged. Successful investing to all!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
Additional disclosure: Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. (Borrowed from Chuck Carnevale.)