Sunday, May 4, 2014

Dividend Screening

While browsing the weekend links, I stumbled upon the "The Little Books..." series.


Of all the books, the ones that I find most curious are "The Little Book That Beats The Market", "The Little Book of Big Dividends" and "The Little Book of Value Investing".

With the title of the post being "Dividend Screening" guess which book I zoomed into?

Without actually reading the book, I browsed for some reviews on the book, which led me to 2 articles, here and here. The first gives an overview, while the second really grinds down into the details of his Big Safe Dividends (BSD) framework.

I took the liberty to go onto the Financial Times Equity Screener and generated a small list of stocks that would fit my rather strict criteria shown below.


As you can see, my criteria is rather strict. With positive MRQ gross margins, 5 year revenue growth and 5 year EPS growth, I'm only looking as business that has been profitable and growing.

With dividend yield to a minimum, payout ratio and interest cover, I'm looking for businesses that are paying out dividends and are likely to continue paying out dividends.

PE and PB measures are also kept low, because I don't believe in paying a premium over the Net Asset Values and I would also like to pick up business at a nice discount.

The end result of the filter is just 17 companies! After looking through their financial ratios, I cut away those with large amount of debts, razor thin profit margins and uncertain cash flows. In the end, all I'm left with is just 3 companies, but they do look quite interesting!

CDW Holdings (D38) (link to annual report) is an interesting story. It is a Japanese owned manufacturing company based in Hong Kong, with operations in China and listed in Singapore. Confusing much? A little, but it is clear that they understand where you should go to milk certain capabilities. HK for access to China, China for access to labour, Japan for access to skill and Singapore for access to capital. I think that they are brilliant!

They are profitable as a business, but I don't feel too comfortable with their margins of 6.5%. However, when I looked around at competitors, their margins are even worse, with half the industry out! 2013 was the 1st year they clocked in negative cash flow in the past 5 years too. Cash holdings are similar to others in the industry, around 18%, but I like it that they have very little debt.

Their dividend history is pretty solid too. I wouldn't expect a drop below 0.03c per share, meaning a dividend yield with a base of 2.3% can be expected on the worst case scenario. Check out their history:

Based on valuations, with a P/E of 4.4 and P/B of 0.91, this business looks like a bargain!

Spindex Industries (564) (link to annual report) is a small company with just 96m in revenues. It has been around for quite a while, manufacturing parts for a wide variety of applications and machines. They have operations in China, Vietnam and Malaysia, making them not just merely a local company.

Profitability-wise, things are looking quite well. With 22% gross margins and 10% profit margins, it does seem like quite a large room of safety. Compared to their peers, their margins are very reasonable and looks very sustainable. Cash reserves are very high (61%!) and debt is non-existent!

Dividend yield looks rather healthy as well, considering how much cash the company is sitting on, they will not have a problem with dividend payments. Yield looks to be attractive to come in around 3.6% indicative. In the past 10 years, yield has only been under 1% just once, and 2 other instances below 2%. Dividends have been growing, but seems to be slowly down in the recent years.

P/E is 8.21 and P/B is 0.926, valuation also looks good, especially with the large cash holdings on hand!

T T J Holdings (K1Q) (link to annual report) is a slighter bigger company with 125m of revenue. They do steel fabrication and erection and has been around for a long long time! Their website is very cute too, just showing how much they focus on their actual work than to spruce up their website. They have contracts in their pipeline and things look quite decent, meaning they have business!

Profitability is quite decent, 25% gross margin and 15% profit margin. It seems to be able in rake in and keep a higher percentage of its revenue as profits as compared to its peers. Cash flow is surprisingly positive, much better managed than its peers and debt is non-existent as well.

Dividends seem stable and on the rise, something in the ballpark of 2% shown be the case this year. The dividend history is short, but it looks very promising, given that so few companies in that industry pay out dividends.

P/E is 7.76 and P/B is 1.16, valuation is decent. It isn't fantastic, since you're not getting a discount on their assets, but I guess you also have to factor in their growth will all their works in the pipeline.

All in all, I think these 3 companies look fantastic for the prices that they are being sold at! CDW looks the riskiest, but owners are after all being compensated with the biggest dividend yield. Spindex looks resilient with the ability to find other related opportunities if their current business in the pipeline suffers in the future. However, TTJ looks the best given that they already have work committed, plus their very clean looking balance sheet. No wonder they have a slight premium on their net asset value!

I would consider picking them up at these prices, they would seem like quite logical places for resistance and buyers to come in at:
CDW: $0.131
Spindex: $0.480
TTJ: $0.310

Of course, I would be buying them through SCB, given their small sizes per lot! Perhaps a lot, just as a tiny investment, working on the principles of value investing!

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