Investing and probability

Can probability help our investment decisions?

Chance.  Likelihood.  Possibility.  Odds.  Prospects. 

All are synonyms for Probability as far as Thesaurus.com is concerned.

People hearing the word probability may think sports betting or shudder at the memory of the college statistics class they passed – barely.  When they do, they may decide probability is best left alone.

However, probability is a tool we use without thinking about it.  For instance, I might look at the clouds in the sky and think there’s a good chance it will rain today.  You may see a new fishing rod or pair of shoes in the store and believe the odds are slim your significant other will approve of the purchase.  Our kids may peek at candy on the counter and believe the possibility of snagging it without mom or dad finding out is pretty good.  These are examples of probability assessments we use more often than we realize.  As a result, we should not consider probability a daunting math exercise but a subjective, beneficial tool to have on the road of life.

As useful hardware in our toolbox, probability can be employed in our investment decision making similar to the way in which Warren Buffett approaches it.  Probability, deployed within our investment screening and stock selection process, can make us better, more consistent investors by reducing risk.

It seems helpful to use simple probability within the framework of the Dividend Farming Scorecard to demonstrate how it can be put to work.  In this case, the general measures of probability (Low, Medium, High) are applied to each factor within the card.  Each item is also classified as negatively or positively influencing the business. 

Since financial success hinges more on avoiding investment potholes than scaling winners, I’m using probability to narrow the chance I’ll make a poor investment decision.

Reduce risk, increase reward.

For instance, if a company is a Dividend Champion, I believe the probability the firm’s history of dividend increases will continue is “High”.  The corollary assumption is that the chance of a poor outcome by investing in a Dividend Champion is low. 

Below is a general Dividend Scorecard with sample probability assessments and assumed business effects.

FACTOR	METRICS	Probability	Business Effect
CCC List	Champion	High	Positive
Current Yield	4.0%	High	Positive
Company Profile	Red Flags	Medium	Negative
Industry Leadership	Top 10	Medium	Positive
Market Cap	$10 B+	Medium	Positive
P/E	< 20	Medium	Positive
P/B	< 2	Medium	Positive
Debt / Equity	< 1	High	Positive
Dividend History (Years)	25	High	Positive
12 Month Price Range	Lower Half	Medium	Positive
Dividend Payout Ratio	< 75%	Medium	Positive
Portfolio Weight	Slightly Over	Low	Positive

These probabilities and assessments of their influence on the business represent my subjective view.  You might use different factors and probability measures or have alternative thoughts on how those factors can influence a firm’s prospects.

Be aware that firms under analysis rarely present uniformly positive factors.  Consequently, each of us needs to determine how many negative factors we may be willing to accept or to what degree we think any negative factor is acceptable when making the investment decision. 

Regardless of how they’re constructed, frameworks like the example above provide a repeatable method of analyzing investment opportunities.  Such practices help standardize our decision process and improve consistency.  Efforts grounded in facts and logic versus emotion and hyperbole improve our decision quality as well.

When our decisions become consistently better the risk associated with making repeated, poor decisions declines.  Minimizing poor decisions adversely affecting our financial performance leads to success.  In the end, isn’t that what we want? 

  

The thoughts expressed here are those of the author, who is not a financial professional.  Opinions should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.

Top 5 Dividend Payers Going Ex-dividend: Week of 6.10.19

Here are the top 5 dividend paying firms going ex-dividend this week.  Mercury General, NewMarket, and WPP are among the Dividend Champions, Contenders, and Challengers (CCC).  They may be found on the DRIPinvesting.org web site; growing their dividend payments for 32, 8, and 13 years respectively.

Monday: 

Spire Inc.

Paying:  $0.592 per share

On:  July 7

Tuesday:

Public Storage

Paying: $2.00 per share

On: June 27

Wednesday:

Mercury General Corp.

Paying: $0.627 per share

On: June 27

Dividend Champion:  32 Years Growing Divs

Thursday:

WPP, PLC

Paying: $2.475 per share

On: July 8

Dividend Challenger:  8 Years Growing Divs

Friday:

NewMarket Corporation

Paying: $1.75 per share

On: July 28

Dividend Contender:  13 Years Growing Divs

Thoughts expressed here are those of the author, who is not a financial professional.  These opinions should not be considered investment advice.  They are presented for discussion and entertainment purposes.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional. 

Dividend Farming Scorecard: Consolidated Edison (ED)

Consolidated Edison - Utility

Yesterday I posted a Scorecard for Target, based upon an initial review three weeks ago when I built cards for Archer-Daniels-Midland (ADM) and Walgreens (WBA).  During that week in mid-May I also looked at Consolidated Edison as a possible add to the Dividend Farm.  Below is an updated card for ED.

The table provides a snapshot of factors I’m scoring for ED as of June 6, 2019.  Laying out my analysis helps me benchmark a holding or opportunity against target metrics.  It also allows me to quickly compare this firm to alternatives as part of my screening process.

FACTOR	METRICS	ED
CCC List	Champion	Champion
Current Yield	4.0%	3.39%
Company Profile	Red Flags?	Utility
Industry Leadership	Top 10	#9 in U.S.
Market Cap	$10 B+	$29.8 B
P/E	< 20	20.49
P/B	< 2	1.68
Debt / Equity	< 1	2.2
Dividend History (Years)	25	45
12 Month Price Range	Lower Half	100th Percentile
Dividend Payout Ratio	< 75%	66.2%
Portfolio Weight	Under to Slightly Over	Over

CCC List: The DRIPinvesting.org web site provides the list of Champions, Contenders, and Challengers where I normally start.  Consolidated Edison is a Dividend Champion with 45 consecutive years of dividend growth.  It’s a strong record well above my 25 year minimum.

Current Yield:  ED’s yield is 3.39% which is below my desired target by roughly 15%.  As usual, this is not entirely a deal-breaker, but it means other metrics should be solid to remain in contention.

Company Profile:  ED seems to be a perennial favorite for utility investors judging by the frequency with which publications cover it.  Based on that specious and subjective metric, one would think it’s larger than #9 in the U.S.

Industry Leadership:  ED is the #9 utility in the U.S. by revenue at $27.3B per Statista.

Market Capitalization:  With a market cap approaching $30 B, ED is 3 times my minimum target size which is good.  Other utils are larger, but not all are Dividend Champions.

Price to Earnings:  The trailing P/E is barely above my maximum of 20, but outside the line is still outside the line.  In a vacuum, this is also not a show-stopper, but it increases the pressure on the other metrics to show well.  At 20 times earnings, the expected return is 5%.  I don’t want it to go lower.

Price to Book:  The P/B ratio of 1.68 is within my target range.  As an investor, I would still be paying for good will, but not an exorbitant amount given the kind of moat utilities have within their territories.

Debt to Equity:  Debt to equity is almost 2.2x my max.  Not promising but not completely unexpected for an infrastructure or capital asset-heavy entity like a utility.   

Dividend History:  Growing dividends for 45 years is quite solid.  With minimum Champion range starting at 25 years, 45 is respectable for value investors like this Dividend Farmer.  ED’s dividend growth rate isn’t spectacular but has nearly doubled on an annualized basis over the past ten years moving from 2% to 3.6%. 

Price Range:  The price is at the 100^th percentile of its trailing 12-month (TTM) range.  Today ED closed at a 12-month high after climbing nearly 20% since late January.  Great for those who got in around the first of the year, but currently far from bargain territory.

Payout Ratio:  The payout ratio of 66.2% is under my 75% target ceiling.  ED has room to grow its dividend but not nearly as much as alternatives I’ve reviewed.  The ratio may also explain the low annual dividend growth rate (DGR). 

Portfolio Distribution:  ED would be a new holding in my basket adding to a somewhat overweight sector.  Adding ED would push me further into the utility heavy zone, which isn’t favorable.  Then again, having a lot of dividend stability isn’t always a bad thing.

Analysis  

Of the companies reviewed the past several months Consolidated Edison is a reasonable possibility.  Had I picked it up in January, the price run would have been a nice mid-year gift.  However, at the very top of its 12-month range probability indicates it’s more likely to go down than up.  Depending on the size of a possible decline, the P/E could fall back into my range potentially improving two of the metrics (P/E and price) sufficiently to make ED a solid add to the Dividend Farm.  I’ll keep an eye on it.  Who knows, Con Ed may fall back to a January-ish price range making it a buy again.

The thoughts expressed here are those of the author, who is not a financial professional.  Opinions should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.

Dividend Farming Scorecard: Target Corp. (TGT)

Three weeks ago, on May 15, I looked at Target, but didn’t construct a Scorecard.  Instead I built cards for Archer-Daniels-Midland (ADM) and Walgreens (WBA).  Consequently, I thought I’d update and publish a TGT Scorecard.

I’ve been reviewing the Dividend Champions regularly for additions to my Dividend Farm.  TGT is a Champion in a defensive sector – consumer goods.  Although not an underweight sector in my portfolio, I would consider adding TGT to the the farm if it looks good.

The table provides a snapshot of factors I’m scoring for TGT as of June 5, 2019.  Laying out my analysis helps me benchmark a holding or opportunity against target metrics.  It also allows me to quickly compare this firm to alternatives as part of my screening process.

FACTOR	METRICS	TGT
CCC List	Champion	Champion
Current Yield	4.0%	2.56%
Company Profile	Red Flags?	Consumer goods
Industry Leadership	Top 10	#8 in U.S.
Market Cap	$10 B+	$43.8 B
P/E	< 20	14.96
P/B	< 2	3.94
Debt / Equity	< 1	2.66
Dividend History (Years)	25	51
12 Month Price Range	Lower Half	Top 10%
Dividend Payout Ratio	< 75%	44.6%
Portfolio Weight	Under to Slightly Over	Over

CCC List: The DRIPinvesting.org web site provides the list of Champions, Contenders, and Challengers where I normally start.  TGT is a Dividend Champion with 51 consecutive years of dividend growth.  That record is difficult to exceed.

Current Yield:  TGT’s yield is 2.56% which is nearly 35% below my desired objective.  Although not ideal, the low yield alone is not a show-stopper.  There appears to be room for dividend growth and a long history of increases already, but if too many other factors are off the mark, this one won’t tip the scales in favor of adding to the portfolio.

Company Profile:  TGT is a household staple for many consumers when it comes to weekly family purchases.  It’s a solid one-stop shop for a variety of consumer goods from food to furniture and pharma to Starbucks.

Industry Leadership:  TGT is the #8 consumer goods retailer in the U.S. which is solid, but not spectacular.

Market Capitalization:  With a market cap at nearly $44 B TGT has the size to offer stability many retailers crave, but can’t deliver.  The fact that it’s over 4x my target is a plus.

Price to Earnings:  The trailing P/E just under 15 is well within my range indicating investors aren’t overpaying for TGT’s expected earnings.

Price to Book:  The P/B ratio of 3.96 is nearly twice as high as my preferred benchmark.  Paying almost $2 for each $1 of assets means other metrics need to be great for it to stay in consideration.

Debt to Equity:  Debt to equity is almost 2.5x my max.  Not promising.   

Dividend History:  Growing dividends for 51 years is stellar.  If a Champion is crowned after 25 years, making it to 51 is laudable for value investors like this Dividend Farmer.  With a dividend growth rate that’s declined from 15% ten years ago to just over 3% in the past year, growth to get out of the subpar yield range doesn’t look likely.

Price Range:  The price is above the 90^th percentile of its trailing 12-month (TTM) range.  The price was considerably lower 3 weeks ago which means it’s rebounded nicely in less than a month.  However, it means purchasing today wouldn’t constitute bargain shopping.

Payout Ratio:  The payout ratio of 44.6% is well under my 75% ceiling.  TGT has a lot of room to grow its dividend but its recent raises have been on the conservative side.  Although there’s plenty of headroom, it doesn’t appear TGT executives are going to make us of it soon.

Portfolio Distribution:  TGT would be a new holding in my basket bolstering a sector already well represented.  Adding TGT would not put me in dangerous overweight territory, but the firm has to show superior fundamentals to be in contention.

Analysis  

Of the companies reviewed the past several months Target isn’t a dud.  Had I picked it up a month ago, the price run since then would have been a nice bonus.  However, with a couple of the fundamentals well outside my benchmark wheelhouse, a price that’s not a bargain, and other opportunities offering better prospects, TGT won’t be planted on the Dividend Farm at this time.

The thoughts expressed here are those of the author, who is not a financial professional.  Opinions should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.