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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