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Dividend Investing: A Review of The Little Book of Big Dividends
In Brief
An income screening approach outlined in the "Little Book of Big Dividends" that is focused on stocks with low dividend payout ratios as well as nine other fundamental (and momentum) based criteria.
Background
Charles Carlson is the CEO of Horizon Investment Services, an investment advisory business, and Horizon Publishing, a publisher of investment newsletters. Horizon's flagship publication, Dow Theory Forecasts, is one of the longest-standing investment newsletters in the US.
In his enjoyable 2010 book, "Little Book of Big Dividends", he outlines a quantitative system for income-hungry investors looking to construct a portfolio that generates big, safe dividends easily through his BSD (Big, Safe Dividends) formula.
How It Works
In the book, Carlson discusses two approaches - the basic BSD formula and the Advanced BSD version. We focus in this article on the Advanced BSD version.
This is because, other than the payout ratio, the basic formula relies entirely on what he calls the Quadrix® ranking system. Quadrix is a somewhat "black box"-ey quantitative scoring system which ranks stocks based on more than 100 different variables across six categories, including Momentum (e.g. growth in earnings, cash flow, and sales), Quality (e.g. return on equity amp; return on assets), Value, financial strength, earnings...
Gearing up for 2012
A potentially significant catalyst to SAC#8217;s share price performance will be the release of an updated Malku Khota preliminary economic assessment (PEA) due in June 2012, focusing on refining operating (including potentially increased annual production) and cost parameters. Following this release we expect a positive re-rating of our valuation, which currently stands at US$8.04/share for Malku Khota (adjusted for Q112 financial results and the recent US$16m fund-raising/dilution) and US$1.19/share for the sizeable 4.5bn Ib copper equivalent Escalones resource in Chile (on an EV/tonne basis).
Two growth scenarios
Stratec#8217;s new guidance shows uncertainties over 2012 associated with the ongoing Gen-Probe acquisition by Hologic; the FDA has approved the Panther system. The c 9,500 system base yields high-margin spare sales and is expanding. DiaSorin placed 92 Liaison XL in Q1 and is ramping up. Stratec expects to achieve #8364;160m sales in 2013 and could hit over #8364;182m by 2014. EBIT in 2012 could be #8364;21-26m.
Building nicely
IMS confirmation of robust London trading may not surprise, given continuing upbeat market news, but is no less welcome. Not only was group RevPAR gain in Q1 well ahead of our full-year estimate (admittedly in the least representative quarter and currency boosted) but its origination predominantly from higher room rate rather than occupancy should allow PPHE to mitigate cost pressures. We have revised forecasts for the purchase of Dutch minority interests.
Filling the right spot
Ormonde#8217;s flagship Barruecopardo tungsten project is slated for first production in 2013 and is forecast to become one of the largest suppliers of tungsten to the market outside of China. The recently released feasibility study confirms that the project is viable having low capital intensity and a competitive cash cost position. While the company is yet to complete the permitting, funding and off-take for Barruecopardo, we stick to our un-risked valuation of £0.24 per share and expect the stock to re-rate as the company#8217;s risk profile gradually improves.
Everybody seems to like Rolls Royce, but does that mean you should own it?
It?s hard to argue with Rolls Royce (LON:RR.) if you want a company which can produce steady income growth over the long-term with limited risks, but how does it stack up as a value investment at almost 830p a share?
With sales and profits measured in billions, as well as staff measured in tens of thousands across the globe, there are few companies that are safer. In fact the company?s past results are so impressive that I?d be more than happy to join existing shareholders as a part owner of this iconic company? but only at the right price.
Between 2002 and 2012 sales have gone from about 360p to almost 600p; adjusted earnings have gone from 11p to almost 48p and the dividend has moved up from 8p to over 17p today. By every meaningful measure the company has more than doubled its return to shareholders and that is exactly what most investors want to see.
Even better than that, the share price has gone from around 150p in 2002 (or if you timed it right, an incredible 70p in March 2003) to the 830p we see today. Even if you just got in at 150p rather than 70p, you would have...
Improving lab results
Positive metallurgical results from Amur#8217;s work on the Kun-Manie project indicate very favourable increases in potential life of mine concentrate grades (increasing project value), reduced tonnages (lowering cash costs) and more representative data of likely operating parameters than the 2007 SRK pre feasibility study (upon which we principally based our previous valuations). Although our base case estimate of Kun-Manie#8217;s value remains at US$394m or £0.71 per share, updated metallurgical and operating parameters could potentially (if they are proved to be indicative of Kun Manie as a whole and representative for the life of mine) lift our estimate as high as US$731m or £1.32 per share (based on a nickel price of US$20,000/t).
Major Indian CyLec order
Cyan has received its largest order to date in the Indian market, worth over $1m. The order provides an endorsement of Cyan#8217;s CyLec technology, and shows that the recent development work undertaken to support the Indian electricity metering market has paid off. The TNEB tender in India (for which the outcome is due imminently) could provide additional material orders in this market.
Become A Safer Investor ? Get Married
Married CEOs and fund managers take less risks than single ones.
Sex and CEOs
Sexual selection ? the competition for mates ? lies at the heart of Charles Darwin's theory of natural selection. All things being equal ? which they never are, of course ? any behavior or attribute which makes an individual more attractive to breeding partners should end up being selected for because the unsuccessful individuals in the mating game leave no offspring.
Given the biological imperative to pass on their genes you'd expect people to be fairly aggressive in trying to do so. The evidence suggests that humans, like other species, tend to become risk-takers when confronted with the need to acquire a partner, particularly one of higher status. All of which leads to the slightly odd conclusion that, if you want your money handled as safely as possible, you should look for married managers in stable relationships. Or women.
Risks and Rewards
The original idea behind natural selection was about competition for scarce resources. Food is the obvious resource ? but accessing sources of food only keeps you alive, it doesn't guarantee you'll manage to pass on your genes. Hence...
Can a management shake-up cure AstraZeneca?
Shareholder revolts have claimed the jobs of a handful of Britain?s most high profile bosses in the last couple of months, among them David Brennan, the chief executive of drugs giant AstraZeneca (LON:AZN).
After six years in the role, Brennan is leaving under a cloud of concern about the drug giant?s ability to replenish its product pipeline at a quicker rate than the speed at which blockbuster drugs are dropping off-patent. Three weeks ago, when the group announced its first quarter earnings, it was plain how serious the situation has got.
Revenues were down 11 percent to $7.35 billion, with 8 percent of that decline credited to losing exclusivity on some key brands. As a result, pre-tax profits fell by a startling 38 percent to $2.05 billion. With EPS falling (and a lowered target this year), AstraZeneca finds itself in the position of owning the lowest P/E ratio of its big pharma peers ? just 7.0 versus an industry average of 13.
Until this week, AstraZeneca stood out as the company that qualified for the highest number of trading strategies followed by Stockopedia ? an impressive 11 screens spanning value, quality and income. But that figure has...
Right place, right time?
In relatively short order, PVE has built a portfolio of assets across the Po Valley region of northern Italy that could quickly exploit the current opportunities presented here from both attractive regulatory terms and buoyant gas prices. Modest capital additions are required to access 15bcf of gas, while 20.2mmboe of additional resources offers numerous upside options. Despite robust economics, PVE remains heavily discounted both to our fundamental valuations and to peers.
Au down, but EPSe up
A lack of available shotcrete equipment and difficult ground conditions in Q112 combined to force changes to the mining sequence, which adversely affected both ore throughput and grades. As a consequence, both operational and financial results were below Edison#8217;s expectations. However, while the mining sequence has changed, the mine plan has not. As such, official production guidance for the year remains broadly unchanged; notwithstanding the recent decline in the gold price to US$1,535/oz, Edison#8217;s estimates have actually increased (see Exhibit 2 on page 6), albeit fractionally.
Well positioned
Ubisense#8217;s Real-Time Location Systems (RTLS) division has developed a wireless technology for tracking moving assets with a high degree of accuracy. We expect this to be adopted by an increasing number of manufacturing customers, with the potential to drive substantial revenue growth and build on the earnings generated by the company#8217;s geospatial consulting business. With net cash, the company is well positioned to grow organically and via acquisitions.
Three market strategy
Vitec#8217;s more focused approach to its key core markets delivered strong (24%) underlying PBT growth in FY11. Driven by a broadened portfolio across each of its divisions, robust sales growth should result in meaningful margin expansion and earnings growth. Despite this, Vitec shares are trading on undemanding multiples compared with those of its peers.
