Dividend Champions On Sale - The April 2021 Heat Map

Summary

• Dividend Champions can form the cornerstone of any income-oriented portfolio, but most of us don’t have enough time to analyze all 141 stocks thoroughly.
• To represent the trade-off between quality and price, we group the candidates into three categories, namely “Attractive Value”, “Expensive But Worth It” and “Best of Best”.
• We show you the most promising, research-worthy companies of each category on a heat map, while also ranking them by their current yield.

Introduction

Besides publishing our “Wide-Moat Stocks On Sale” monthly shortlist of companies exclusive for Seeking Alpha readers, this parallel stock selection series focuses on finding the right candidates fitting a Dividend Growth Investor’s portfolio. While a company’s dividend policy should always be viewed in the context of other capital allocation possibilities (the main goal being value creation for shareholders), we truly understand that many readers are at a stage in life, where dependable income is a high priority when making investment decisions.

The Dividend Champions is an exclusive group of companies that have increased their dividend every year for at least 25 years. The comprehensive database (commonly referred to as the CCC Spreadsheet) was started by David Fish and is currently maintained monthly by Justin Law. On these foundations, we aim to provide investors a tool, resting on the EVA Framework, to aid the decision-making process by narrowing down the list of Dividend Champions based on quality and valuation. Since EVA (Economic Value Added) cuts through accounting distortions and charges for the use of capital, it is the best tool we can employ to analyze a firm by looking through the true shareholder value creation lens.

Seeing investment candidates on a heat map with a quality and valuation axis is something that can prove to be very useful when we need to make a decision on which companies to analyze thoroughly. As explained in our research article, we use the PRVit (Performance-Risk-Valuation investment technology) model of the EVA Dimensions team. In a nutshell, PRVit is a multifactor quantitative stock selection model, based on EVA-centric measures of Performance, Risk, and Valuation. It first estimates the fundamental value of a company based on its risk-adjusted EVA performance (shown on the vertical axis) and then compares it to its actual valuation (shown on the horizontal axis).

Before we jump into the stock selection process, we must note that EVA has its flaws when it comes to REITs and early-stage biotech firms. In the case of the latter, much of the market value is based on future sales of a drug/product that doesn’t yet exist, thus we can’t opine on the validity of future products embedded into the share price. This is less of a concern though since pre-sales biotech firms cannot make it to the Dividend Champions list. As for REITs, we do not recommend using the EVA Framework in an investment decision process, as the way their capital structure is built creates extreme levels of volatility and scenarios when the analytics become nearly impossible to discern. With all that said, let’s dissect the latest update of the Dividend Champions list with the goal of finding research-worthy candidates.

The Heat Map of the most investable Dividend Champions

As a general rule of thumb, we are looking for a favorable trade-off between quality and value, in line with Charlie Munger’s philosophy:

“The investment game always involves considering both quality and price, and the trick is to get more quality than you pay for in price. It's just that simple."

The heat map gives us a way to visualize this interdependency, where the white diagonal line represents “fair value” territory or the area where the quality we get is exactly what we pay for in price. Needless to say, we are looking for investment opportunities where the risk/reward ratio is skewed in our favor, hence our focus lies in the blue, “favorable” area. As an absolute quantitative criterion, we set the threshold of PRVit > 70 for a Dividend Champion to make it worthy of further analysis. As of April 5, there are 41 companies out of 141 that are able to pass this hurdle. In the following sections, we provide the shortlisted Dividend Champions corresponding to four zones on the favorable side of the heat map, namely:

• “Expensive But Worth It”: High Quality (Q>60) and Expensive (V>60)

• “Attractive Value”: Low Quality (Q<40) and Cheap (V<40)

• “Best of Best”: High Quality (Q>60) and Cheap (V<40)

• “Misfit But Favorable”: Not fitting into any of the above (but Q>V).

Source: Institutional Shareholder Services Inc.

Dividend Champions that are “Expensive But Worth It”

This group contains companies with the selection criteria of Quality > 60 and Valuation > 60. In this section, we find stocks with a valuation lower than their outstanding quality would justify. As of April 5, there are 39 companies fitting into this category, out of which only 12 fulfill the PRVit>70 quantitative criterion. Below you can see the qualifying companies in a table format, ranked by their current yield to make your decision-making process easier. (Stocks highlighted in light blue are the ones with a PRVit score above 70.)

Source: Institutional Shareholder Services Inc., dripinvesting.org (data as of April 5)

Using the heat map, we can visualize the shortlisted group of Dividend Champions that are “Expensive But Worth It” and also fulfill the rigorous PRVit>70 absolute criterion.

Source: Institutional Shareholder Services Inc.

Dividend Champions that provide “Attractive Value”

This group contains companies with the selection criteria of Quality < 40 and Valuation < 40. Needless to say, this category is not for the faint-hearted, since there is often a reason why a sector or a company is beaten down. As the EVA Framework helps to separate the wheat from the chaff, we might find hidden gems that could provide a compelling risk/reward scenario, although this subset of companies is only for investors who are willing to compromise on quality. As of April 5, there are 4 companies fitting into this category, out of which only 1 fulfills the PRVit>70 quantitative criterion. Below you can see the qualifying companies in a table format, ranked by their current yield to make your decision-making process easier.

Source: Institutional Shareholder Services Inc., dripinvesting.org (data as of April 5)

Using the heat map, we can visualize the shortlisted group of Dividend Champions that provide “Attractive Value”. Source: Institutional Shareholder Services Inc.

The “Best of Best” Dividend Champions

This group contains companies with the selection criteria of Quality > 60 and Valuation < 40. Finally, this is a category where outstanding quality meets compelling valuation, a group of Champions definitely worthy of further investigation. As of April 5, there are 14 companies fitting into this category, out of which all fulfill the PRVit>70 quantitative criterion. Below you can see the qualifying companies in a table format, ranked by their current yield to make your decision-making process easier.

Source: Institutional Shareholder Services Inc., dripinvesting.org (data as of April 5)

Using the heat map, we can visualize the shortlisted group of “Best of Best” Dividend Champions.

Source: Institutional Shareholder Services Inc.

The “Misfit But Favorable” Dividend Champions

This group contains companies with the selection criterion of Quality > Valuation, that fall outside the previously discussed three zones on the heat map. In this category, the price/quality relation is still skewed in our favor, but these companies cannot be labeled as any of the categories before due to their borderline quant ratings. As of April 5, there are 33 companies fitting into this category, out of which 14 fulfill the PRVit>70 quantitative criterion. Below you can see the qualifying companies in a table format, ranked by their current yield to make your decision-making process easier.

Source: Institutional Shareholder Services Inc., dripinvesting.org (data as of April 5)

Using the heat map, we can also visualize the shortlisted group of Dividend Champions that are “Misfit But Favorable” and also fulfill the rigorous PRVit>70 absolute criterion. Source: Institutional Shareholder Services Inc.

Analyst’s Disclosure: I am/we are long ADM, BEN, CVX, FRT, GWW, MCD, MMM, IBM, MO, O, PEP, T, ROW, VFC, WBA, XOM.LOW, PII. 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.

Comments

[Valantur]

PBCT, #1 on the Best of the Best list, has a negative 70% total return vs SP500 over the last 5 years

[pluton7]

What's the community take on USBI?

[Psycho Analyst]

I want to own the dividend champions of the future, not the past. That requires that companies have a trajectory to be growing their earnings as well as their dividends. And I don't want to risk capital on slow growing companies paying trivial dividends, either. A slavish adherence to companies that raise their dividend every year as opposed to those that grow their business every year will leave you with a lot less money to spend over the long term.

[Valantur]

@Psycho Analyst PREACH!!!!

[LCB Investor]

I won’t buy anything with A yield below 4%. Most of these companies don’t fit that bill.

[BM Cashflow Detective]

“The law of the economy forbids getting a lot of value for little money. If you accept the lowest offer, you have to add something for the risk you take. And if you do that, you'll have enough money to pay for something better."
- John Ruskin

Well, yes, it is always up to you what to buy.

"Expensive but worth it"

"Best of Best"

"Attractive values"

"Quality is not a coincidence, it is always the result of careful thought."
- John Ruskin

Well, after reading this article, I'll have a lot of time to think about it. Thanks John.

[RoyalAce]

So many of these "dividend" columns seem stuck trying to justify as reasonable stocks that yield less than 1 to 2+%, . As a long term investor my experience has been that these levels first of all are not serious, real after tax, after inflation income, will take many years before they are and lastly do not justify holding an equity risk in anything but sustained bull markets. Further these mediocre yields provide little, if anything in terms of support in market breaks.

Bottom line: At best, the majority of stocks such as "expensive but worth it" are perhaps total return vehicles and not really income vehicles. IF ONE NEEDS/WANTS EQUITY INCOME I'd suggest the buyer look at companies that pay meaningful amounts but maybe don't achieve that cheerful consensus of "worth it". T (listed) fits that bill as do unlisted PRU, LUMN, NAVI, OKE, many reits and MLPs

[Valhalla Hunt Club]

@RoyalAce Hear, Hear

[pat0]

@RoyalAce Most of the stocks that you listed have declining revenue, debt that is insurmountable (20 x earnings). With interest rates expected to rise it would be wise to avoid companies that are over-leveraged with declining revenue.

[RoyalAce]

@pat0 Strongly disagree. "insurmountable" is ludicrous in light of the great progress that has been made already in the cases of T and LUMN in particular. And you can't be looking for a perfect situation already priced for its perfection and paying 7-8%, when green shoots are appearing. PRU has a 3 digit book value and is planning to return billions to shareholders in the next 3 years. Rock solid balance sheet, great dividend increases and paying 5%. Unless I missed it, not even mentioned as an income candidate.

[Nate the Great]

TFM - I've been looking for something to replace the $KO that I dumped, and $UVV was one I was considering; the data you provide here adds to that concept...and I can replace a DK with another DK at a higher yield! Always a good read...thanks.

[User 40509285]

@Nate the Great, $UVV is a good company, but if you want a better bargain in the tobacco industry buy $BTI. Better yield and at a bigger discount.

[Nate the Great]

@G-man$$ - thanks for the tip, but I've already got a full position of $BTI in my cash account. I agree with you! This is for my ROTH account, where I like to keep my DK's because I don't use that income for living expenses; I reinvest them and let the account grow, so I can accept a slightly lower yield. $UVV will be one of the higher yields in that account. Yeah, I do wish it were a little cheaper....