STOCK ANALYZER GUIDE
The Stock Analyzer was created to help dividend investors save time and make better investment decisions – with a single click, all of the key metrics needed to evaluate a dividend stock are presented in an easy-to-consume format.
This is a very powerful tool packed with plenty of data. The following guide walks through each section of the Stock Analyzer to explain how to interpret and use the information presented to pick better dividend stocks.
Company Snapshot
The top section of the Stock Analyzer can be seen below and provides a company overview.
Starting in the top left section (outlined in red below), you see the stock’s ticker symbol (“KO”), followed by the company name (“Coca-Cola Company”). On the second line, you will find the stock’s sector (“Consumer Staples”), followed by its industry (“Soft Drinks”). Below that are the stock price ($38.52), the company’s market capitalization ($167.5B), and dividend yield (3.43%).
In the middle are three grey boxes labeled “Safety”, “Growth”, and “Yield”. Each box contains a score, ranging from 0 to 100. Scores over 75 are very good, scores below 25 are risky, and scores of 50 are average. The “Safety” box evaluates the safety of the current dividend, the “Growth” box evaluates how quickly a company can grow its dividend going forward, and the “Yield” box ranks a stock’s dividend yield against all other dividend yields in the market. Higher scores are better across each metric.
In the example below, we see that KO has an extremely safe dividend (99 Safety Score) with about average dividend growth prospects (57 Growth Score) and a dividend yield slightly above the market’s average (63 Yield Score).
On the far right is the “Valuation” box, which contains four valuation metrics:
Data Definitions
P/E Ratio: divides the stock’s current price by its last fiscal year’s diluted earnings per share.
Free Cash Flow Yield: divides the stock’s free cash flow per share earned in its last fiscal year by its current price.
Dividend Yield: divides the stock’s indicated annual dividend per share by its current price.
Price-to- Book Ratio: divides the stock’s current price by its most recent book value per share.
Dividend Information
The next section in the Stock Analyzer is called “Dividend Information” and, you guessed it, contains all of the information you need to know about a stock’s dividend.
The first table contains information about the dividend payment, the stock’s payout ratios, the stock’s most recent ex-dividend date, when the dividend is paid out, and how often the dividend is paid:
Data Definitions
Dividend Yield: divides the stock’s indicated annual dividend per share by its current price.
Annual Payout: the total amount of dividends per share that the company has indicated it will pay over the course of the current year.
EPS Payout Ratio: the percentage of a company’s earnings that went to paying its dividend over the trailing four quarters. Lower payout ratios (e.g. below 60%) provide more room for dividend growth and greater cushion to continue paying the dividend in case the company runs into business challenges.
FCF Payout Ratio: the percentage of a company’s free cash flow that went to paying its dividend over the trailing four quarters. Free cash flow is generally less volatile than earnings and represents actual cash, so some dividend investors prefer to use this payout ratio instead of the EPS payout ratio.
Ex-Dividend Date: you must own the stock before its ex-dividend date to receive its next dividend payment.
Pay Date: the date that the next dividend will actually be paid out to shareholders who owned the stock as of its most recent ex-dividend date.
Payment Frequency: how often a company pays its dividend. Most stocks pay a dividend on a quarterly basis, but some pay monthly, semi-annually, or annually.
The next table is all about historical dividend growth. It is useful to see how quickly and how long a dividend has grown, as well as if dividend growth has been accelerating or decelerating over different periods of time.
Data Definitions
Dividend Growth Streak: how many consecutive years a company has increased its dividend. In this case, we can see that KO has grown its dividend for at least 20 straight years.
1-Year Growth: the company’s dividend growth in the last full calendar year. In KO’s case, we can see the company grew its dividend by 8% in 2014.
3-Year CAGR: the compound annual growth rate (“CAGR”) of the stock’s dividend per share over the last three full calendar years. KO grew its dividend per share at a 9% annual rate from 2012-2014.
5-Year CAGR: the CAGR of the stock’s dividend per share over the last five full calendar years. KO grew its dividend at an 8% annual rate from 2010-2014.
10-Year CAGR: the CAGR of the stock’s dividend per share over the last ten full calendar years. KO grew its dividend at a 9% annual rate from 2005-2014.
Below the dividend growth table is a chart showing a company’s total dividend payments made per share during each calendar year (note that it includes special dividends). In KO’s case, we can see it paid out $0.08 in dividends per share in 1988 and grew its dividend to $1.22 per share in 2014:
The next chart shows individual dividend payments made by the company. This is helpful to see if the dividend was recently increased or reduced:
Finally, the “Dividend Information” section allows you analyze trends in payout ratios over long periods of time. A rising payout ratio means that the company’s dividend is growing faster than its earnings and cash flow, which isn’t sustainable longer-term. Low (e.g. under 60%) and stable payout ratios over time are preferred.
Stock Performance
The Stock Performance section reveals how well a dividend stock has performed over different periods of time. Great companies and investments will outperform the market over long periods of time to create value for shareholders. The following tables and charts will help you quickly identify companies that have created value for shareholders.
The first table shows a stock’s total shareholder return (the change in share price, plus any dividends paid) over the last 1-month, 6-months, and 1-year. Data is updated daily.
The next table shows a stock’s total shareholder return (“TSR”) over the last 3-, 5- and 10-year time periods and compares it to the market’s rate of return. Note that the returns shown are the stock’s annual rate of return. For example, from 2012-2014, KO’s stock returned 9.5% per year compared to the market’s total return of 20.1% per year.
You will also find a chart that displays a stock’s total shareholder return compared to the market over the last 20+ years. When the line rises in a given year, it means the stock outperformed the market. Likewise, a falling line means the stock is underperforming the market. The chart quickly informs you if a stock has consistently created value for its shareholders or been a disappointment.
In KO’s case, we can see that the stock nicely outperformed the market from 2005 through 2011 (a rising line) but underperformed from 2011 through 2014:
Annual Fundamentals
After reviewing a stock’s dividend and performance history, it’s time to dig in to the fundamentals of the business. The “Annual Fundamentals” section displays 10 charts of key fundamental data to help you quickly review a stock’s business trends.
Data Definitions
Sales Growth: displays the percentage change in a company’s total sales from one fiscal year to the next. Growing sales generally support rising earnings, which help long-term dividend growth prospects. KO’s total sales declined 2% in fiscal year 2014 (“FY 14”), and you can see the business held up well during the recession with sales falling just 3% in FY 09.
Diluted Earnings per Share Growth: displays a company’s change in diluted earnings per share from one fiscal year to the next. Earnings growth fuels long-term dividend growth. KO’s diluted earnings per share declined 16% in fiscal year 2014 (“FY 14”).
Data Definitions
Diluted Earnings per Share: a stock’s net income divided by the weighted average of common stock shares outstanding over the past year, adjusted for dilutive shares. You want to find companies that have stable to increasing earnings because rising earnings fuel dividend growth.
Free Cash Flow per Share: a stock’s free cash flow divided by the weighted average of common stock shares outstanding over the past year, adjusted for dilutive shares. Free cash flow represents the cash that a company generates after paying to maintain or grow its asset base. Free cash flow is important because it is needed to allow a company to continue paying a dividend, amongst other uses. Look for businesses that consistently generate cash.
Data Definitions
Return on Equity: measures how profitable a company is by dividing how much profit a company generated in one year by the amount of money shareholders have invested in the company (net income divided by shareholders’ equity). Warren Buffett believes that return on equity is one of the most important factors in making successful stock investments and tends to favor companies that have earned returns in the mid-teens over long periods of time. Note that companies with high levels of debt will often have a much higher return on equity, so it’s important to also look at a company’s return on invested capital.
Return on Invested Capital: return on invested capital is similar to return on equity, but it differs in that it considers the money equity and debt holders have given the company. It divides a company’s earnings by the sum of its shareholders’ equity and book debt each year. Once again, a good business generally earns returns in the mid-teens and demonstrates reasonable stability.
Data Definitions
Operating Margin: this is a measure of profitability and represents the money left after a company deducts its cost of goods sold and operating expenses. The remaining profit is divided by sales to produce the operating margin. You should look at the level, trend, and volatility of margins to better understand a company’s quality level and cyclicality. As of September 2015, the median operating margin across the 2,700+ dividend stocks in our database was 13%, and the top quartile operating margin was 24%. Higher operating margins can be a sign of a higher quality business.
Asset Turnover: this takes a company’s total sales and divides by the company’s total assets (e.g. property, equipment, inventory etc.) that were used to generate the sales. The more sales a company can generate from its existing assets, the better. Improving asset turnover generally leads to higher returns on invested capital. Even if operating margins are low, a company can earn a reasonable return on capital if its asset turnover is very high – think of a distributor or a grocery store as examples.
Data Definitions
Long-term Debt to Capital: a leverage metric that measures the proportion of a company’s capital structure that is funded by long-term debt rather than equity. In FY 14, KO’s long-term debt to capital ratio was 0.38, meaning that 38% of KO’s total capital was in the form of long-term debt. More volatile businesses are generally better off maintaining lower levels of debt. For these companies, some caution is warranted if the debt to capital level exceeds 50%.
Diluted Shares Outstanding: as shareholders, our equity stake in the company increases when the business buys back its own stock and decreases when the company issues more stock. Warren Buffett likes businesses that repurchase shares (when they are cheap), and you can see if a stock has been buying back shares or diluting its shareholders by analyzing the trend in this chart. A decreasing slope means that shares outstanding are declining. You can see that KO’s shares outstanding have decreased from 4,786 million in FY 05 to 4,450 million in FY 14.
Quarterly Fundamentals
After reviewing annual data, it is very important to make sure near-term business trends align with your assessment of the company as well. Basically, you want to make sure that nothing surprising has happened recently that might change your opinion of the business. The following charts in the Stock Analyzer show important fundamental metrics over the prior eight quarters.
Data Definitions
Sales Growth: displays the percentage change in a company’s total sales from one fiscal quarter to the prior year’s comparable fiscal quarter. Growing sales generally support rising earnings, which help long-term dividend growth prospects. KO’s total sales declined 3% in the second quarter of its fiscal year 2015 (“Q2-15”).
Diluted Earnings per Share Growth: displays a company’s change in diluted earnings per share from one fiscal year to the next. Earnings growth fuels long-term dividend growth. KO’s diluted earnings per share declined 16% in fiscal year 2014 (“FY 14”).
Data Definitions
Operating Margin: this is a measure of profitability and represents the money left after a company deducts its cost of goods sold and operating expenses. The remaining profit is divided by sales to produce the operating margin. As of September 2015, the median operating margin across the 2,700+ dividend stocks in our database was 13%, and the top quartile operating margin was 24%. Higher operating margins can be a sign of a higher quality business.
Diluted Earnings per Share: a stock’s net income divided by the weighted average of common stock shares outstanding over the past fiscal quarter, adjusted for dilutive shares. You want to find companies that have stable to increasing earnings because rising earnings fuel dividend growth.
Data Definitions
Asset Turnover: this takes a company’s total sales and divides by the company’s total assets (e.g. property, equipment, inventory etc.) that were used to generate the sales. The more sales a company can generate from its existing assets, the better. Improving asset turnover generally leads to higher returns on invested capital. Even if operating margins are low, a company can earn a reasonable return on capital if its asset turnover is very high – think of a distributor or a grocery store as examples.
Long-term Debt to Capital: a leverage metric that measures the proportion of a company’s capital structure that is funded by long-term debt rather than equity. More volatile businesses are generally better off maintaining lower levels of debt. For these companies, some caution is warranted if the debt to capital level exceeds 50%.
Credit Metrics
Reviewing a company’s balance sheet is essential before investing. Companies with too much debt that fall into hard times can see their equity value (i.e. your investment value) plummet because debtholders are paid out before equity holders receive anything. The following credit metrics are found at the very end of the Stock Analyzer’s output:
Data Definitions
Current Ratio: divides a stock’s total current assets (e.g. cash, inventory, accounts receivable) by its total current liabilities (e.g. accounts payable, short-term debt). If the current ratio is less than 1.0, it could mean that the company needs to raise money to meet its short-term obligations.
Net Debt / EBIT: reduces a company’s total book debt by the amount of cash it has on hand and divides that figure by earnings before interest and taxes (“EBIT”) generated over the prior twelve months. In other words, it tells you how many years of EBIT are needed to pay off the company’s net debt. We generally prefer to look for companies with Net Debt / EBIT ratios under 2.0.
EBIT / Interest Expense: if a company has significant amounts of debt and business fundamentals become challenged, interest payments can consume most of a company’s cash flow. This metric divides the EBIT a company has earned over the past twelve months by the interest expense it has paid over that same period. Essentially, it tells you how easily a company can meet its interest payments. We generally prefer companies with an EBIT / Interest Expense ratio of at least 6.0 (i.e. they generate at least $6 of operating profit for every $1 of interest expense).
Cash ($ millions): the amount of cash on a company’s balance sheet as of its most recent quarter. We like to compare this figure to the company’s total book debt to see how well its debt is covered with current cash on hand. If the gap is substantial, we like to see a business that shows stability and has generated nice free cash flow.
Last Fiscal Year Free Cash Flow: free cash flow can be used to reduce debt, repurchase shares, pay a dividend, reinvest in the business, or acquire other companies. If a company has significant debt, it can be nice to see if it at least generated substantial free cash flow in its most recent fiscal year.
Total Book Debt: the sum of a company’s short-term debt and long-term debt as of its most recent quarter.
TTM Interest Expense: the company’s total interest expense over the last twelve months.