Dividend Champions On Sale - The October 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 140 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.

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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).

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 October 18, there are 38 companies out of 140 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 October 18, there are 29 companies fitting into this category, out of which only 7 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 October 18)

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 are only for investors who are willing to compromise on quality. As of October 18, there are 4 companies fitting into this category, out of which none 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 October 18)

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 October 18, there are 13 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 October 18)

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 October 18, there are 34 companies fitting into this category, out of which 18 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 October 18)

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.

One more thing

We plan to run this process each and every month and publish the shortlist of targets it produces. In the subsequent weeks, we also plan to publish thorough analyses of the most promising targets in each of the three categories, exclusively for Seeking Alpha readers.

Disclosure: I/we have a beneficial long position in the shares of TROW, BEN, CAH either through stock ownership, options, or other derivatives. 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.