Reasonable Stock Values: PE Ratios Less Than Dividend Yields

As a follow-up to my earlier post on John Mauldin’s guest commentary feature, I decided to run a scan thru Hillbent’s Market Direction Monitor for stocks trading at forward PE ratios less than their current dividend yields in an effort to discover some reasonable equity market values.

Like John Mauldin, I tend to agree that a 6% dividend yield covers a lot of market sins, so a minimum required yield is 6%. However, from this point forward, I include some of my own risk management parameters:

1) Sustainability of the dividend is paramount and, therefore, I require a payout ratio of 50% or less. Essentially, this means that a company’s net earnings is at least twice as much as the dividend it pays out to its shareholders.

2) As a professional money manager, I generally am less forgiving when it comes to liquidity. However, as this screen is tailored more towards a “buy and hold” type strategy, I have lowered the average daily liquidity requirement to 100k shares.

3) Lastly, since this screen is somewhat contrarian in terms of investor sentiment, I am screening only for stocks with Hillbent’s proprietary composite grade rating of “C”. (”A” is strongest and “E” is weakest in terms of the fundamental outlook for a stock’s revenue and earnings stability.) Essentially, a “C” in Hillbent’s universe translates into a “hold” rating. I am neither “hot” or “cold” on these names.

The results produced 17 names (see table below) from Hillbent’s 3000 universe (i.e., average daily volume of 100k and top 3000 in market capitalization).

In exchange for owning stocks apparently stuck in neutral, the contrarian investor gets paid a minimum yield of 6% or an average yield of 12.51% if he/she buys an equally weighted portfolio of these securities.

Assuming that economic conditions do not devolve from a state of worse to worser or worst, an investment in these compounding dividends might be just the vehicle to smooth the bumpy roads ahead in this recession.

(Note that the purpose of this report is not to provide specific recommendations, but instead serve as a starting point for investment ideas. It is strongly recommended that you do your own homework and due diligence research analysis.)

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