Analysts on Wall Street are well known for rating far more stocks positively than negatively. They are also known for not providing an edge to those who follow their ratings. In fact, the stocks with the best average analyst ratings don’t actually outperform those with the worst. Given this, the stocks with the best and worst ratings can be a jumping point for finding stocks that may do worse than or better than expected.
Two months ago, I wrote SDividend Yield: A Simple Indicator to Add to the Dividend Investing Toolbox, a post about a dividend indicator for finding high sustainable dividends. Since then, the ten stocks in the S&P 500 with the highest SDividend yields have outperformed the S&P 500 by almost 4% and the Dow Jones Select Dividend Index by 1.5%. Given the strong performance, I thought I would revisit the indicator and update the table.
Research has indicated that stocks with high yields and low payout ratios outperform stocks with high yields alone. To take advantage of this strategy, I created the SDividend yield, an indicator that “adjusts” the dividend for the payout ratio. Combining two indicators into one not only allows me to find stocks with high payout adjusted yields, it also allows me to easily compare one stock against another.
Because of the method of calculation, the value of the SDividend yield is lower than the normal dividend yield. The median SDividend yield for dividend paying stocks in the S&P 500 is around 1.1%, while the median of the normal dividend yield is around 2%.
|Top Quartile||greater than 1.57||greater than 3.25|
|2nd Quartile||between 1.07 and 1.57||between 2.11 and 3.25|
|3rd Quartile||between 0.58 and 1.07||between 1.14 and 2.11|
|Bottom Quartile||less than 0.58||less than 1.14|
Below is a list of the 10 stocks in the S&P 500 with the highest SDividend yield. Public Service Enterprise Group Inc. (PEG), Time Warner Cable Inc. (TWC), The Travelers Companies Inc. (TRV), and Entergy Corporation (ETR) are new to this list, replacing The Chubb Corporation (CB), American Electric Power Co., Inc. (AEP), FPL Group Inc. (FPL), and Lockheed Martin Corporation (LMT)
|Company||Ticker||Dividend Yield (%)||SDividend Yield (%)|
|Merck & Co. Inc.||mrk||4.49||3.143|
|Eli Lilly & Co.||lly||5.975||2.92775|
|Cincinnati Financial Corp.||cinf||5.895||2.65275|
|Constellation Energy Group Inc.||ceg||2.74||2.6304|
|Public Service Enterprise Group Inc.||peg||4.435||2.61665|
|Time Warner Cable Inc.||twc||2.935||2.55345|
|The Travelers Companies Inc.||trv||2.93||2.3733|
The Enterprise Value / Revenue ratio (“EV/Rev”) is an indicator similar to the Price / Sales ratio but with a difference that can make it superior. While both indicators have sales in the denominator, Enterprise Value / Revenue substitutes price with an alternative known as enterprise value.
Enterprise Value = Market Cap – Cash & Equivalents + Debt + Minority Interest + Preferred Shares
Often simplified as Market Cap – Cash & Equivalents + Debt
Enterprise value can be thought of as the true price of a business since buying a business includes receiving its cash and taking on its debt. Using enterprise value instead of market cap in a valuation metric has the effect of penalizing debt and rewarding cash.
However, problems arise when we look at stocks with the lowest EV/Rev.
The companies with the lowest positive ratios are those that have almost as much cash as market cap plus debt. When a company has more cash than market cap plus debt, the ratio becomes negative and can no longer be compared to other companies even though it may be a better value than a company with a low EV/Rev.
On the other hand, this is not a problem with large cap stocks. Stocks with negative enterprise values are mostly micro-cap stocks with troubled operating history.
In short, Enterprise Value / Revenue has an advantage over the similar Price / Sales ratio but also has a problem when applied to micro-cap stocks. Although it should not be the only indicator used to determine which stocks to invest in, it can be a powerful tool when combined with other indicators.
A few more thoughts:
- Free cash flow, or operating cash flow could be used instead of revenue, as could book value or earnings.
- Enterprise Value / Revenue compared to projected growth could be used similarly to the PEG ratio.
- Enterprise Value / Revenue data is available on Yahoo Finance.
- The median Enterprise Value / Revenue ratio is near 1.5.
S&P 1500 Stocks with the Lowest Enterprise Value to Revenue Ratio
|Company||Ticker||Enterprise Value / Revenue|
|WellCare Health Plans Inc.||wcg||0.02|
|Health Net Inc.||hnt||0.07|
|Ingram Micro Inc.||im||0.07|
|Tech Data Corp.||tecd||0.07|
|Molina Healthcare Inc.||moh||0.07|
|World Fuel Services Corp.||int||0.09|
|Cardinal Health Inc.||cah||0.12|
|Office Depot Inc.||odp||0.13|
|Kelly Services Inc.||kelya||0.13|
|Eastman Kodak Co.||ek||0.14|
|The Great Atlantic & Pacific Tea Company Inc.||gap||0.14|
|Nash Finch Co.||nafc||0.14|
|Novatel Wireless Inc.||nvtl||0.14|
|Stewart Information Services Corp.||stc||0.14|
In their research paper, “High Yield, Low Payout”, Credit Suisse analysts Pankaj N. Patel, Souheang Yao and Heath Barefoot found that the combination of a high dividend yield and a low payout ratio performed better than high yield alone.
To be able to follow a strategy such as the one in the paper, I created a simple indicator that combines both the dividend yield and the payout ratio. It does this by “adjusting” the dividend for the payout ratio. The formula is as follows.
SDividend Yield = (Dividend*(1-Payout Ratio))/Price
Payout Ratio = Dividend/Earnings
The SDividend yield can be used to compare the dividend yield and payout ratio of stocks at the same time. This is useful for sorting stocks by yield while ensuring that the yield is sustainable.
SDividend yields and normal dividend yields cannot be compared to each other. The median SDividend yield for dividend paying stocks is slightly below one, whereas that of the regular dividend yield is closer to three. The SDividend yield for a stock can also be negative. This is caused by a payout ratio of over 100%. These companies are ones with which extra caution should be taken because there is a low chance of the company continuing to pay dividends.
Although I do not think this should be the only indicator used in dividend investing, I believe it can be a very useful addition to the toolbox of a dividend investor. It is also not a replacement for the dividend yield because the dividend yield IS the actual yield whereas the SDividend yield is not. Nevertheless, by using the SDividend yield instead of the regular dividend yield, we can gain a more accurate depiction of which stocks have high dividend yields combined with low payout ratios.
The 10 stocks in the S&P 500 with the highest SDividend yield are as follows. This is not a list of stocks to buy but rather a list of stocks to do further research on.
|Name||Ticker||Price||Stock Rank||SDividend Yield (%)|
|Merck & Co. Inc.||mrk||37.71||80.910||2.93|
|Eli Lilly & Co.||lly||36.15||81.523||2.705|
|Constellation Energy Group, Inc.||ceg||36.05||88.550||2.57|
|Cincinnati Financial Corp.||cinf||29.08||80.309||2.22|
|The Chubb Corporation||cb||52.05||83.490||2.17|
|American Electric Power Co., Inc.||aep||34.49||55.907||2.15|
|FPL Group Inc.||fpl||48.84||62.396||2.13|
|Lockheed Martin Corporation||lmt||83.88||70.308||2.1|