Month 96 - Watch List for S&P 100 Companies in the Vanguard High Dividend Yield Index - June 2019

Situation: All investors have an objective as well as a plan to reach that objective. I started with the objective of getting my children through college, then moved on to having a comfortable retirement. Direct stock ownership has been a key part of both plans. Why stocks? Because mutual funds are sold on the basis of long-term performance records, not safety from market crashes. But a small group of stocks are relatively safe because of being issued by a large company that reliably pays a good and growing dividend. The trick is to have a Watch List of 20-30 such companies and know “the story” behind each company.

Mission: Use our Standard Spreadsheet to evaluate companies in the S&P 100 Index that also appear in the FTSE High Dividend Yield Index, i.e., the ~400 companies in the FTSE Russell 1000 Index that reliably pay an above-market dividend. Our source document is the list of companies in VYM (the capitalization-weighted Vanguard High Dividend Yield ETF,
which is the US version of the FTSE High Dividend Yield Index.

Execution: see Table showing a spreadsheet with 36 columns of information for commons stocks issued by 27 US companies.

Administration: 54 companies are common to both indexes but 27 have been  excluded from our Watch List because an item of information needed to populate a cell in the spreadsheet is missing and/or the company's S&P ratings are too low to denote above-average safety. We require an A- bond rating or better and a B+/M stock rating or better.

A key requirement is to avoid overpaying for a stock. I’m a numbers guy, so I use two numbers to decide if a stock is overpriced (where “price” or P is defined as the 50-day moving average):
   1) the 7-yr P/E is greater than 30 (see Column AD in the Table. 
   2) the stock’s Graham Number, which is the square root of 22.5 times EPS (Earnings Per Share) multiplied by BV/Sh (Book Value Per Share), is greater than 250% of its price (see Column AB in the Table). 

If only one of those two numbers is over the limit, the stock is still overpriced if the other number is close to the limit (more than 25 or 200%, respectively).

Another key requirement is to know whether a company's stock is a worthwhile investment, given its current price. As a starting place, I’ve devised a Basic Quality Screen that has only 6 elements and a maximum score of 4 (see Table):
   1) If price appreciation over the past 16 years has been greater than 1/3rd the risk of short-term loss as determined by the BMW method, one point is added. In other words, 16-Yr price appreciation in Column K is greater than 1/3rd the risk in Column M.
   2) If Tangible Book Value in Column S is negative and either LT-debt represents more than 50% of Total Capital (Column O), or Total Debt is more than 250% of EBITDA (Column P), one point is subtracted. 
   3) If the S&P Bond Rating in Column U is A- or better, one point is added. 
   4) If the S&P Stock Rating in Column V is B+/M or better, one point is added. 
   5) If Net Present Value of dividend growth (based on trailing 5-Yr dividend growth in Column H) and cash-out value after a 10 year Holding Period (determined by extrapolation of trailing 16-Yr price appreciation in Column K) is a positive number when applying a Discount Rate of 10% (see Column Z), one point is added. 
   6) If the two markers of an overpriced stock noted above (see Columns AB and AD) indicate that the stock is indeed overpriced, half a point is subtracted.

The final SCORE is found in Column AJ.

Bottom Line: As expected, these 27 companies have not performed as well as SPY, the S&P 500 Index ETF (see Line 29 to Line 35 at Columns C through F in the Table). But these 27 companies pay a higher dividend (Column G) and have lower price volatility (see Columns I & M) than SPY. Estimates for Net Present Value after a 10 year holding period (assuming a continuation of the trailing 5 year dividend growth rate and the trailing 16 year price growth rate and trading costs of 2.5% at the time of purchase and sale) were higher than SPY (see Column Z).  

Conclusion: These 9 stocks appear to be over-priced (see Columns AB and AD): CSCO, KO, TXN, PEP, JNJ, LMT, MMM, CL and UPS. These 12 appear to be bargain-priced “value stocks” based on Book Value, Graham Number and average 7 year P/E (see Columns AA-AE): PFE, NEE, DUK, INTC, TGT, SO, JPM, CMCSA, USB, BLK, XOM and WFC. These 10 appear to be worthwhile investments because of having a score of either 3 or 4 on our Basic Quality Screen (see Column AJ): PFE, NEE, DUK, INTC, PG, SO, JPM, WMT, CAT, BLK.

Risk Rating: 6 (where 10-Yr US Treasury Bonds = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into NEE, KO, INTC, PG, JNJ, JPM, WMT, CAT and IBM. I also own shares of PFE, CSCO, DUK, SO, PEP, MMM, BLK, UPS and XOM. Note that all but two (BLK and PEP) of those 18 are in the 65-stock Dow Jones Composite Average.

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