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Monday, June 04, 2012

If You Can't wait, Be Careful

Every once in a while my aimless roaming about dark corners of the market pays off with a solid idea that might have been overlooked. Last night in a discussion with a fellow investor he pointed out that some investors were either not in a position, or of the temperament, to wait for the market to fall into a depressed state before putting money to work.  He felt that this condition may apply to income oriented investors in particular as may need the income now and may have to commit the unforgivable sin of spending capital if they are forced to wait for a better entry point. I have to admit this is a valid consideration.

I spent some time thinking about the idea this morning. I can see where some folks may need or simply have a strong desire to get their income oriented money to work now rather than later. Even where this is this case I do not think you can abandon sound principles. I want to maintain some measure of long term safety while collecting my dividends and also want the prospect of inflation beating performance. I want companies in this buy it now portfolio that have sound fundamentals and the prospect of future dividend increases.

I sat down and ran a basic screen looking for stocks that paid at least 3% in annualized dividends and had a solid history of dividend growth. As a measure of financial strength and potential for appreciation I used the Piotroksi F score. I have found this measure to be one of the best indicators of financial and operating improvement and companies with the two highest rankings would seem to offer a certain amount of financial safety in my opinion This a simple screen but it turned up some stock that I think income investors could buy and sleep at night while collecting their dividends.  These stocks will still get hit in a broad market decline but history shows us that stocks with these characteristics  are able to continue paying generous dividends and rebound quickly as the market recovers.

Some of the names will be familiar to income oriented investors. Reynolds American (RAI) is one of the stocks uncovered by the screen. Although tobacco stocks are widely hated by many investors this company has better than doubled its dividend over the past decade and score a solid 8 on the F-score scale. The two highest ranked stocks are mutual fund provider Waddell and Reed (WDR) and Akzo Noble (AKZOY), the Dutch paint and chemical company. Both have F-scores of 9 and respectable dividend yields.

As attractive as these two income stocks might be they are not the hidden gem I uncovered. I found a smaller bank in Ohio, of all places, that has a very high F-score of 8 and pays a generous 6.5% dividend.  United Bancorp (UBCP)) is a small capitalization bank located in Martins Ferry. The company has 20 banking offices and is located right along the borders of West Virginia and Pennsylvania. More importantly from an investors point of view it is right smack in the middle of the Marcellus and Utica oils shale fields.
Although the shares trade at a slight premium to book value this is a close to a perfect little bank as you may ever find. Nonperforming assets are just 1.52% of total assets. Loan loss reserves are 90% of potential exposure. They have maintained adequate capital even while paying a substantial dividend. The dividend today is 60% higher than it was a decade ago. Insiders own 20% of the bank and have a strong incentive to grow the bank and the stock price over time. The results of this careful stewardship are reflected by the fact that they have not had a loss in the past five years of difficult operating conditions for small banks.

I prefer to wait to get the bulk of my capital to work when Mr. Market is in his highly depressed phase but if you have to get money to work now a focus on dividends, sound balance sheets and superior prospects is the best way to select a portfolio. This screen can help you find the type of gems that enable you to get paid now and reduce risk.

Originally Published 5-31-12 as a Real Money Column

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