My High Dividend Stocks Blog http://myhighdividendstocks.posterous.com Most recent posts at My High Dividend Stocks Blog posterous.com Tue, 29 Mar 2011 12:26:54 -0700 A Mechanical Check for Investment in Common Stocks. The First in a Series. http://myhighdividendstocks.posterous.com/a-mechanical-check-for-investment-in-common-s http://myhighdividendstocks.posterous.com/a-mechanical-check-for-investment-in-common-s

In this blog post I’m going discuss some aspects of the mechanical tests your should apply to common stocks you are considering to buy and at what price.

On March 16th, 2011 I wrote about not buying a common stock generally above 20 times average earnings in this post: http://bit.ly/MaxAvgPE .  I have to admit that I was a little lazy.  Like most people I used 20 times the current annual earnings to complete the table in that blog post because it the info was readily available, but a five or ten year average is more through and enlightening.  It takes a while to find all the earnings data for the past ten years and then to make adjustments for changes in capitalization, warrants, and convertible preferred stocks.

The excerpt below from Benjamin Graham’s Security Analysis 2nd edition is a devastating indictment on how speculative so-called investors are both in 1940 and today.

Over the next couple of days I’m going to calculate many values for testing common stocks for investment basis that I’ve already written about on this blog.  The goal is separate the speculative stocks from the investment stocks.  The list includes: GoldCorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), SeaDrill (SDRL), Safe Bulkers (SB), and AT&T (T).

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Higher Prices May Prevail for Speculative Commitments.  The intent of this distinction must be clearly understood.  We do not imply that it is a mistake to pay more than 20 times average earnings for any common stock.  We do suggest that such a price would be speculative.  The purchase may easily turn out to be highly profitable, but in that case it will have proved a wise or fortunate speculation.  It is proper to remark, moreover, that very few people are consistently wise or fortunate in their speculative operations.  Hence we may submit, as a corollary of no small practical importance, that people who habitually purchase common stocks at more than about 20 times their average earnings are likely to lose considerable money in the long run.  This is the more probable because, in the absence of such a mechanical check, they are prone to succumb recurrently to the lure of bull markets, which always find some specious argument to justify paying extravagant prices for common stocks.

            Other Requisites for Common Stocks of Investment Grade and a Corollary Therefrom.  It should be pointed out that if 20 times average earnings is taken as the upper limit of price for an investment purchase, then ordinarily the price paid should be substantially less than this maximum.  This suggests that about 12 or 12.5 times earnings may be suitable for the typical case of a company with neutral prospects.  We must emphasize also that a reasonable ratio of market price to average earnings is not the only requisite for a common-stock investment.  It is a necessary but not sufficient condition.  The company must be satisfactory also in its financial set-up and management, and not unsatisfactory in its prospects.

            From this principle there follows another important corollary, viz.: An attractive common-stock investment is an attractive speculation.  This is true because, if a common stock can meet the demand of a conservative investor that he get full value for his money plus not unsatisfactory future prospects, then such an issue must also have a fair chance of appreciating in market value.

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Wed, 16 Mar 2011 15:44:38 -0700 A Suggested Basis of Maximum Appraisal for Investment. http://myhighdividendstocks.posterous.com/a-suggested-basis-of-maximum-appraisal-for-in http://myhighdividendstocks.posterous.com/a-suggested-basis-of-maximum-appraisal-for-in

Stay away from purchases of all these high dividend stocks yielding over 6% and a P/E ratio above 20 listed in the table below.  The following excerpt is straight out of Security Analysis 2nd Ed. Pg 537-538.  Please read this 71 year old wisdom and then examine the table of high dividend stocks that you should avoid for investment right now.

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The investor in common stocks, equally with the speculator, is dependent on future rather than past earnings.  His fundamental basis of appraisal must be an intelligent and conservative estimate of the future earning power.  But his measure of future earnings can be conservative only if it is limited by actual performance oer a period of time.  We have suggested, however, that the profits of the most recent year, taken singly, might be accepted as the gage of future earnings, if (1) general business conditions in that year were not exceptionally good, (2) the company has shown an upward trend of earnings for some years past and (3) the investor’s study of the industry gives him confidence in its continued growth.  In a very exceptional case, the investor may be justified in counting on higher earnings in the future than at any time in the past.  This might follow from developments involving a patent or the discovery of new ore in a mine or some similar specific and significant occurrence.  But in most instances he will derive the investment value of a common stock from the average earnings of a period between five and ten years.  This does not mean that all common stocks with the same average earnings should have the same value.  The common stock investor (i.e., the conservative buyer) will properly accord a more liberal valuation to those issues which have current earnings above the average or which may reasonably be considered to possess better than average prospects or an inherently stable earning power.  But it is the essence of our viewpoint that some moderate upper limit must in every case be placed on the multiplier in order to stay within the bounds of conservative valuation.  We would suggest that about 20 times average earnings is as high a price as can be paid in an investment purchase of common stock.

Although this rule is of necessity arbitrary in its nature, it is not entirely so.  Investment presupposes demonstrable value, and the typical common stock’s value can be demonstrated only by means of an established, i.e., an average, earning power.  But it is difficult to see how average earnings of less than 5% upon the market price could ever be considered as vindicating that price.  Clearly such a price-earnings ratio could not provide that margin of safety which we have associated with the investor’s position.  It might be accepted by a purchaser in the expectation that future earnings will be larger than in the past.  But in the original and most useful sense of the term such a basis of valuation is speculative.  It falls outside the purview of common-stock investment.

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The list below only considers stocks with a current P/E of 20 and above.  Determining average earnings over a five year period require a lot of work.  But stay away from purchases of all these high dividend stocks yielding over 6% and a P/E ratio above 20:

Company name

Symbol

 Market cap

 P/E ratio

Image001
 Div yield (%)

 52w price change (%)

 

Alon Holdings Blue Square Israel Ltd  

BSI

446.92M

25.49

37.14

-20.40

Teekay Tankers Ltd.  

TNK

504.27M

26.27

12.81

-14.49

ING Global Equity Divid.&Premium Opp-ETF  

IGD

1.02B

24.71

11.19

-14.17

Cheniere Energy Partners, LP  

CQP

2.86B

27.11

9.88

14.21

Fifth Street Finance Corp.  

FSC

710.26M

21.60

9.79

8.65

Frontier Communications Corp  

FTR

7.90B

24.87

9.53

4.93

Vector Group Ltd.  

VGR

1.22B

23.86

9.36

15.32

Apollo Investment Corp.  

AINV

2.18B

40.07

9.29

-3.68

Calumet Specialty Products Partners, LP  

CLMT

714.42M

43.75

9.09

-2.04

Encore Energy Partners LP  

ENP

1.02B

31.91

9.02

8.73

DHT Holdings Inc  

DHT

223.08M

35.04

8.93

7.95

Otelco, Inc. (USA)  

OTT

244.07M

362.03

8.83

18.24

StoneMor Partners LP  

STON

466.96M

22.41

8.73

23.72

H&Q Life Sciences Investors  

HQL

246.16M

23.07

8.73

12.35

America First Tax Exempt Investors, LP  

ATAX

171.40M

67.39

8.68

-1.87

Gladstone Commercial Corporation  

GOOD

172.48M

188.29

8.27

25.55

Hercules Technology Growth Capital Inc  

HTGC

454.86M

97.56

8.18

4.98

BreitBurn Energy Partners LP  

BBEP

1.21B

33.89

8.01

35.73

Martin Midstream Partners LP  

MMLP

792.46M

60.84

7.77

24.03

CommonWealth REIT  

CWH

1.76B

56.21

7.74

-14.81

Baltic Trading Ltd  

BALT

197.35M

23.34

7.58

-36.74

Penn Virginia Resource Partners LP  

PVR

1.33B

30.80

7.51

4.55

Monmouth RE Inv. Corp.  

MNR

276.32M

23.55

7.43

2.15

Enerplus Corp (USA)  

ERF

5.35B

41.16

7.24

30.42

Vanguard Natural Resources, LLC  

VNR

934.10M

25.01

7.24

27.48

Medical Properties Trust, Inc.  

MPW

1.21B

97.43

6.97

3.80

Legacy Reserves LP  

LGCY

1.31B

42.30

6.91

33.96

Agree Realty Corporation  

ADC

224.46M

23.55

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