PEY: Resisting The Market Downturn

Summary

  • PEY is a dividend growth ETF with a 4% yield.
  • It is heavy in utilities, financials and consumer staples.
  • Valuation is attractive, but quality is not.
  • PEY has outperformed the benchmark by a wide margin in 2022.
  • However, performance since inception is underwhelming.
  • Looking for a helping hand in the market? Members of Quantitative Risk & Value get exclusive ideas and guidance to navigate any climate. Learn More »

Bull and Bear Stock Market Prices Concept.

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This dividend ETF article series aims at evaluating products regarding the relative past performance of their strategies and quality metrics of their current portfolios. As holdings and their weights change over time, I may update reviews, usually once a year.

PEY Strategy And Portfolio

The Invesco High Yield Equity Dividend Achiever ETF (NASDAQ:PEY) has been tracking the NASDAQ US Dividend Achievers 50 Index since 12/09/2004. It has 50 holdings, a distribution yield of 4.01% and a total expense ratio of 0.53%.

As described on Invesco’s website,

The Index is comprised of 50 stocks selected principally on the basis of dividend yield and consistent growth in dividends. The Fund and the Index are reconstituted annually in March and rebalanced quarterly.

The fund invests exclusively in U.S. based companies of all size segments.

PEY ETF - Asset value by market capitalization

Asset value by market capitalization (chart: author; data: Fidelity)

The heaviest sectors are utilities (24.7%), financials (21.4%) and consumer staples (17.3%). Other sectors are below 9%. Compared to the S&P 500 (SPY), the fund overweights these three sectors, and underweights technology, consumer discretionary, healthcare and communication services a lot.

PEY ETF - Asset value by sector

Asset value by sector (Chart: author; data: Fidelity)

The top 10 holdings, listed in the next table with some fundamental ratios, represent about 27% of asset value. The largest holding weighs 3.2%, so risks related to individual stocks are low.

Ticker

Name

Weight%

EPS growth %TTM

P/E TTM

P/E fwd

Yield%

MO

Altria Group Inc

3.23

-29.52

28.72

9.70

7.63

UVV

Universal Corp

3.09

-1.40

16.37

N/A

5.56

IBM

International Business Machines Corp

2.95

1.82

22.18

13.87

4.88

XOM

Exxon Mobil Corp

2.79

234.97

15.88

9.38

3.67

HCSG

Healthcare Services Group Inc

2.76

-68.41

37.15

26.32

5.26

UNM

Unum Group

2.62

17.48

7.45

6.50

3.56

NWBI

Northwest Bancshares Inc

2.54

32.18

11.06

13.53

6.49

PNW

Pinnacle West Capital Corp

2.44

7.63

13.45

17.76

4.77

PM

Philip Morris International Inc

2.42

4.39

17.05

17.90

5.08

LYB

LyondellBasell Industries NV

2.34

150.50

5.56

5.80

4.88

Historical Performance

Since inception in December 2004, PEY has underperformed SPY by 2.71 percentage points in annualized return, with a higher risk measured in volatility (standard deviation of monthly returns) and maximum drawdown.

Total Return

Annual.Return

Drawdown

Sharpe ratio

Volatility

PEY

180.56%

6.08%

-73.43%

0.39

17.35%

SPY

336.57%

8.79%

-55.42%

0.6

15.02%

Data calculated with Portfolio123

However, PEY has beaten SPY by a wide margin in 2022 year-to-date (-1.8% vs. -20.9% from 1/1 to 6/13).

The next chart plots the equity value of $100 invested in PEY and SPY since PEY inception, with all dividends reinvested.

PEY vs. SPY

PEY vs. SPY (Chart: author: data: Portfolio123)

Scanning The Current Portfolio

PEY holds 50 stocks. It is much cheaper than the S&P 500 regarding the usual valuation ratios (see next table).

PEY

SPY

Price / Earnings TTM

13.35

20.05

Price / Book

1.65

3.85

Price / Sales

1.07

2.58

Price / Cash Flow

10.18

15.55

In previous articles, I have shown how three factors may help cut the risk in a dividend portfolio: Return on Assets, Piotroski F-score, Altman Z-score. My core portfolio holds 14 stocks selected using these metrics (more info at the end of this post). I have scanned PEY holdings with these quality metrics. I consider that risky stocks are companies with at least 2 red flags among: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or dubious Altman Z-score, excluding financials and real estate where these metrics are less relevant. With these assumptions, 9 stocks are risky, and they weigh about 17% of asset value, which is not very good.

Based on my calculation, aggregate Altman Z-score, Piotroski F-score and return on assets are below SPY’s aggregate values. These metrics point to a portfolio quality inferior to the benchmark.

PEY

SPY

Altman Z-score

2.08

3.32

Piotroski F-score

5.57

6.16

ROA% TTM

5.22

7.89

Takeaway

PEY implements a dividend growth strategy in a high-yield stock universe. Over 63% of asset value is in 3 sectors: utilities, financials and consumer staples. The dividend yield and valuation ratios are attractive, but quality metrics and past performance since inception are mediocre. However, it is close to flat in 2022, outperforming the S&P 500 by 19%. For transparency, my equity investments are split between a passive ETF allocation (PEY is not part of it) and an actively managed stock portfolio, whose positions and trades are disclosed in Quantitative Risk & Value.

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This article was written by

Fred Piard profile picture
14.34K Followers
Data-driven model portfolios and market risk indicators.
Author of Quantitative Risk & Value and three books, I have been investing in systematic strategies since 2010. I have a PhD in computer science, an MSc in software engineering, an MSc in civil engineering and 30 years of professional experience in various sectors. My aim is making simple and efficient quantitative investing techniques available to my followers. Quantitative models can make investment decisions faster, reproducible and emotionless by focusing on relevant information in the middle of market noise. Moreover, models can be refined to meet specific risk tolerance and objectives. 

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I am an individual investor and an IT professional, not a finance professional. My writings are data analysis and opinions, not investment advice. They may contain inaccurate information, despite all the effort I put in them. Readers are responsible for all consequences of using information included in my work, and are encouraged to do their own research from various sources.

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Disclosure: I/we have a beneficial long position in the shares of LYB, PM 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.

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