Friday, 26 October 2012

Metric: Average Dividend Yield


Google “Average Dividend Yield”. Surprisingly, there is very little on the topic and practically nothing on how to use it as an investment tool.

The 5 year average dividend yield of a company can easily be found on internet. For example, Yahoo Finance indicates APD’s is 2.7%. Putting APD’s numbers into my Excel spreadsheet, I find that in 2008 and 2009, the maximum yields reached were 4.10% and 4.12%, respectively. That’s significantly higher than 2.7%! For comparison, APD currently yields 3.28%.

I might be 6 feet under the next time APD yields over 4%, or it may just be around the corner. It’s impossible to predict. And that’s precisely why I follow about 100 of the best dividend growth companies; because sooner or later, a few will drop enough in price to yield even more than they did in 2008 and 2009.

Among others, Walgreen Co. stands out.

The highest yields reached by WAG in 2008 and 2009 were 1.95% and 2.34%, respectively. In 2012, the stock bottomed at $28.53 with a dividend of $1.10. That’s a yield of 3.86%, much higher than in 2008 or 2009. Of course, WAG dropped in price for a reason. Uncertainty in its future gave us an opportunity to buy at a low price.

I bought 200 shares of WAG in 2010 for $29.00 (2.41% yield), just before it went to $26.26. Shortly thereafter, the stock price rocketted to about $44, only to come back down to $28.53. I never thought of selling. Instead, I bought 100 more in June 2012 for $30.21 (3.64% yield).

The entry yield on a stock will greatly influence your future returns.

Although buying at a low valuation reduces your risk, the yield is high for a reason (i.e. the price is low for a reason). But more often that not, market pessimism is a retail investor’s friend.

Wednesday, 24 October 2012

Intel on Sale?


I’m not a big fan of technology stocks. I recently bought Dell because it is cheap, cheap and… cheap. Around the same time, I picked up a bit of Intel. Why? Have a look at the following:

INTC-N
Year
High Price
Low Price
1Q
div.
2Q
div.
3Q
div.
4Q
div.
Annual Dividend
High Yield
Low Yield
2000
$75.81
$29.81
$0.015
$0.015
$0.020
$0.020
$0.07
0.23%
0.09%
2001
$38.59
$18.96
$0.020
$0.020
$0.020
$0.020
$0.08
0.42%
0.21%
2002
$36.78
$12.95
$0.020
$0.020
$0.020
$0.020
$0.08
0.62%
0.22%
2003
$34.51
$14.88
$0.020
$0.020
$0.020
$0.020
$0.08
0.54%
0.23%
2004
$34.60
$19.64
$0.040
$0.040
$0.040
$0.040
$0.16
0.81%
0.46%
2005
$28.84
$21.94
$0.080
$0.080
$0.080
$0.080
$0.32
1.46%
1.11%
2006
$26.63
$16.75
$0.100
$0.100
$0.100
$0.100
$0.40
2.39%
1.50%
2007
$27.99
$18.75
$0.1125
$0.1125
$0.1125
$0.1125
$0.45
2.40%
1.61%
2008
$26.34
$12.06
$0.1275
$0.140
$0.140
$0.140
$0.55
4.54%
2.08%
2009
$21.27
$12.05
$0.140
$0.140
$0.140
$0.140
$0.56
4.65%
2.63%
2010
$24.37
$17.60
$0.1575
$0.1575
$0.1575
$0.1575
$0.63
3.58%
2.59%
2011
$25.78
$19.16
$0.1812
$0.1812
$0.210
$0.210
$0.78
4.08%
3.03%
2012


$0.210
$0.210
$0.225
$0.225
$0.87


2013


$0.225
$0.225
$0.225
$0.225
$0.90


Stock price and dividends are per calendar year.

11y ave
2.14%
1.31%
Dividends are listed in the quarter they were paid.

5y ave
3.85%
2.39%







3y ave
4.10%
2.75%







5y
$23.38
$37.69







3y
$21.93
$32.72







Super Cheap
$19.37


The table shows the 3 year average dividend yield to be 4.10% ((4.65% + 3.58% + 4.08%)/3). I use the numbers in the “High Yield” column for obvious reasons.

Using the current cash dividend of $0.90, one would have to pay $21.93 for a 4.10% yield.

Buying the stock at its low in 2009 would have earned you an initial yield of 4.65%. Using the current dividend, that corresponds to a stock price of $19.37 today (see “super cheap” price in the table above).

Graham Price

Intel's 2009, 2010 and 2011 EPS were $0.77, $2.01 and $2.39. 3Y Ave EPS = $1.72.
Intel’s book value is $9.86.
Graham Price = SQRT (3Y Ave EPS * BV * 22.5) = $19.55

Cyclically Adjusted Price to Earnings Ratio

Intel’s 10Y Ave EPS = $1.20
CAPE = 10Y Ave EPS / Stock Price = $1.20/$21.46 = 17.88
A CAPE below 20 is very good.

Conclusion

These three metrics indicate that Intel is fairly valued. I guess one could argue undervalued, but I don’t think that’s the case.

On October 9th, I purchased 100 shares of Intel for $21.85/share + $9.95 commission. I plan to add another 100 shares if the price falls below the Graham price.

Don’t hesitate to leave comments, especially if I’m unclear. I aim at writing short articles that are easy to understand. Your feedback will help me do just that. If you'd like to see this type of analysis for a particular stock, ask and I'll do my best. 


Sunday, 21 October 2012

A look at McDonalds


I calculate how much I should pay for a stock by dividing the current annual cash dividend by the 3 year and 5 year average dividend yields.

Furthermore, my “super cheap” price is obtained by dividing the current annual cash dividend by a stocks highest yield over the last 10 years.

McDonalds stock price dropped 4.46% on Friday, giving rise to a lot of chatter over the weekend. The table below shows how I determine if the current price of $88.72 is overvalued, fair or undervalued.

MCD-N
Year
High Price
Low Price
1Q
div.
2Q
div.
3Q
div.
4Q
div.
Annual Dividend
High Yield
Low Yield
2000
$43.63
$26.38




$0.215
0.82%
0.49%
2001
$35.06
$24.75




$0.225
0.91%
0.64%
2002
$30.72
$15.17




$0.235
1.55%
0.76%
2003
$27.01
$12.12




$0.40
3.30%
1.48%
2004
$32.96
$24.54




$0.55
2.24%
1.67%
2005
$35.69
$27.36




$0.67
2.45%
1.88%
2006
$44.68
$31.73




$1.00
3.15%
2.24%
2007
$63.69
$42.31




$1.50
3.55%
2.36%
2008
$67.00
$45.79
$0.375
$0.375
$0.375
$0.50
$1.63
3.55%
2.43%
2009
$64.75
$50.44
$0.50
$0.50
$0.50
$0.55
$2.05
4.06%
3.17%
2010
$80.94
$61.06
$0.55
$0.55
$0.55
$0.61
$2.26
3.70%
2.79%
2011
$101.00
$72.14
$0.61
$0.61
$0.61
$0.70
$2.53
3.51%
2.50%
2012


$0.70
$0.70
$0.70
$0.77
$2.87


2013


$0.77
$0.77
$0.77
$0.77
$3.08


Stock prices and dividends are per calendar year.

11y ave
2.73%
1.87%
Dividends are listed in the quarter they were paid.

5y ave
3.67%
2.65%







3y ave
3.76%
2.82%







5y
$83.85
$95.52







3y
$81.97
$89.68







Super Cheap
$75.78


The 3 year average dividend yield of 3.76%* is obtained by averaging the high yields of 2009, 2010 and 2011. To get such a yield today, one would have to purchase MCD at $81.97 (= $3.08 / 3.76%).

Another way of looking at it: The current yield offered by MCD is 3.47% (= $3.08 / $88.76). The table shows that the high yield of 2007, 2008, 2009, 2010 and 2011 were all higher than the current yield. This tells me that MCD is not cheap enough to buy just yet.

McDonalds will likely not reach my super cheap price of $75.78 = $3.08 / 4.06%, but I like calculating it anyway. And if it does, back up the truck honey.

I encourage you to analyze the significant difference between the high and low stock prices for any given year. The difference is astonishing.


*My method is not perfect as the stocks low price may have occurred before the annual dividend increase.