|
* Extract written by André Gosselin published in his
book "Investir dans les titres de grandes entreprises".
Geraldine Weiss does not hesitate to use in her
investment strategy some basic technical analysis, or more exactly charts,
in order to have a good overview of a stock behavior in the market.
According to her, a 25 years horizon is the ideal, but a 12 years stock
exchange history is sufficient to have a good idea of the market value of a
share.
When we take a close look to the recommendations
Mrs. Weiss proposes to her financial letter subscribers, we notice that,
when the dividend does not represent more than 1 to 3 percents of the stock
price, that is a clue that the stock price is currently too high. When the
dividend reaches a percentage which goes beyond 5 percent of the stock
price, the stock valuation starts to appear like a bargain.
But, once again, it is all relative. A stock A is a
true bargain when its price reaches a historically low support in a 12 year
range, so that the dividend accounts alone for a return of 12%. With regard
to the company B, the bargain is found when the stock price, in a 12 year
horizon, has reached a support that makes it possible to believe that, with
a 6% dividend yield, the investor makes a very good bargain. The ideal
bargain occurs when the security offers a dividend yield among the highest
of its history, coinciding with a stock price among the lowest of its
history.
In addition to the dividend yield over a 12 year
period, Geraldine Weiss and Janet Lowe suggest 3 other complementary rules
to help identify a good bargain in a quality blue chip stock:
1- The price/earnings ratio must be particularly
low for this security and, especially, lower than the average ratio of the
Dow Jones Industrial Average stocks (the only exception to this rule
concerns the growth stocks for which the price/earnings ratio is higher
than their historical average, thanks in particular to record profits or
unexpected from the analysts); 2- The company must have a strong financial
health, i.e. a debt/equity ratio who does not exceed 50 percents; 3- The
stock price should not exceed more than 33 percents of the company book
value.
These three criteria of value investment style are
well studied by academic research; moreover, their meaning are not
confusing.
The owner of a security which offers a good
dividend yield also wants to know if the profits of the company are high
enough to allow a reasonable and constant increase of the dividend. If the
dividend accounts for less than 50 percent of the company profits, it can
be considered that there is still sufficient margin so that the company
management can increase it in the future. With regard to the public utility
companies, the bar can be moved up to 85 percents. In other words, the
dividend can represent up to 85 percent of the profits generated by this
type of company.
What is called the dividend payout ratio (the
percentage of the profits distributed in the form of dividends) can thus
vary considerably from a company to the other. At the time when Geraldine
and Gregory Weiss have published their work, growth companies like Disney,
McDonald's or Wal-Mart had a dividend payout ratio varying from 14 to 16
percents. Other companies, not in such strong expansion, were allowed to
distribute a dividend which eat up almost all the profits generated
(Eastman Kodak: 86 %, Texaco: 92%), whereas some companies granted a
dividend which exceeded the actual profits (Rafter: 105%; Dupont: 169%,
Proctor & Gamble: 189%), which is extremely risky and even dangerous for
the future of this dividend.
According to the criteria elaborated by Mrs.
Weiss to qualify a company of blue chip, 18 of the 30 companies which
constitute the famous Dow Jones index failed the test. Only twelve
companies passed the exam.
André Gosselin
|
