Summary
- Four Health Care and five Materials stocks from the DGI 2015 Candidate List initial screen are reviewed and rated for stock quality.
- Six stocks are selected as purchase candidates for 2015 and beyond.
- Present valuation is evaluated for the final candidates. Four candidates show as worth further review at present prices.
- A list of the 48 candidates from the various articles to date is presented.
Background
I’ve recently posted several articles involving generation of a dividend growth candidate list for 2015. The first two articles presented a screening process and the final results are found here. I am now reviewing each of the sectors. My last review covered both Technology and Telecom stocks and can be foundhere. This article will investigate the Health Care and Materials sector stocks that passed the initial screening. The initial screen pared down the total stocks to review. This article takes the next logical step to rate each of the candidates for stock quality in order to reduce the list to the very best candidates for the sector.
Screening and Rating Process
I’ve provided the details for the screening steps in the first two articles, and more detailed descriptions of the rating process in the Energy Sector article. Please refer to those articles for further information if you are interested. The following table is a summary of the rating process and how I weight various stock characteristics to achieve an overall quality rating.
Rating Parameter Groups and Allocations
| Group | Parameters | Points |
| Performance | EPS, Revenue | 18 |
| Stability | ROE, Debt/Equity, Credit Rating, Beta | 22 |
| Future | 5 yr EPS growth estimate, Moat, Analyst Rating(s) | 20 |
| Income Specific | Years increased, 1 & 3 year DGR, yield | 30 |
| Business | Story – judgment on company overall | 10 |
| Total | 100 |
After I complete the rating, I sort by the quality rating value, and make a selection of the top candidates. After the sort, I do a quick valuation check for the stocks. I have listed notes below the table on how I determined parameters.
Health Care Sector
Here are the Health Care candidates from the end of 2014 candidate list. There are 4 candidates from the early January screen. Note this is a copy of the previously posted table, so the data reflects end of December 2014 data. The remainder of the article will have recent values.
Health Care Candidates
| Company Name | Ticker Symbol | Industry | Div. Yield | Credit Rating | DGR 1-yr | DGR 3-yr |
| Baxter International Inc. | BAX | Drugs | 2.84 | A- | 7.4 | 17.7 |
| Owens & Minor Inc. | OMI | Medical Equipment | 2.85 | BBB | 4.2 | 7.7 |
| Pfizer Inc. | PFE | Drugs-Animal | 3.60 | AA | 8.3 | 9.1 |
| Span-America Medical Systems | SPAN | Medical Equipment | 3.53 | MR 1 | 9.4 | 10.5 |
Notes:
- In the charts above, you may see MR # under credit rating. If there is no credit rating for a stock, I look up the stock in Moody’s to see if there is a “Real Time Credit Risk Score.” These scores range from 1-10, with 1 being highest quality and 10 being lowest. I have included only stocks that are rated 1, 2, or 3 in the initial candidate list screen. However, I have given extra points to stocks with normal credit ratings of BBB- or better in the rating, so the Quality Score does take into account this lower rating.
- Industry group in the chart above is from SA Contributor David Fish’s CCC list found here.
- Yield and other values in this table are based on 12/31/14 yield values from the CCC list. Later values will be updated as noted.
Candidate List Ratings – Health Care Sector
In the table below are the quality ratings for the stocks from above. Note that I have broken the total quality rating into 2 components for transparency. The number rating is the sum of the first 4 groups listed above, and is strictly numerical. The story rating is a score from 0-10 based on my read of the business, how it operates, the goals, the future, etc. This is just an opinion, but this is where I get to impact the rating with some personal thoughts/impressions. Basically, I research each company to get a feel about the business. A negative rating (by me) would disqualify the company (for my purchase). I include these two ratings separately so anyone who desires can update the story rating per personal review or adjust either rating for that matter. In fact, you should consider the story rating as a “due diligence” homework assignment and provide your own value. In the end, I use the total quality rating as the key selector to pick the final candidate list.
The blank row near the middle of the table represents my cut-off for the final list. The stocks above the row make it in the Final Candidate List for 2015, and the stocks below do not. I want to let the ratings select the best overall stocks. I don’t have a specific rating or number to pick the cut-off, so it will vary somewhat from sector to sector. Given 130 stocks total to start, I would like to end up with 50-80 final stocks at the end of the review. For the Health Care Sector, a logical cut-off seemed to be either before or after Pfizer. I decided to make the cut-off above Pfizer in the Candidate List based on the general low score.
Health Care – Quality Rating
| Company | Ticker | Price | Proj Yield | 1 yr DGR | 3 yr DGR | 5 yr DGR | Sub-Industry | Quality Rating | Story Rating | Total Rating |
| Baxter International Inc | BAX | 71.51 | 4.00 | 7.4 | 17.7 | 14.2 | Health Care Equipment | 42 | 3 | 45 |
| Span-America Medical Systems | SPAN | 19.35 | 3.10 | 9.4 | 10.5 | 9.4 | Health Care Supplies | 37 | 3 | 40 |
| Stocks above this line make the Final List, stocks below do not make the final list. | ||||||||||
| Pfizer Inc | PFE | 34.38 | 3.00 | 8.3 | 9.1 | 5.4 | Pharmaceuticals | 29 | 5 | 34 |
| Owens & Minor Inc | OMI | 33.37 | 3.00 | 4.2 | 7.7 | 10.3 | Health Care Distributors | 19 | 5 | 24 |
Notes:
- The ratings were completed with data parameters gathered in the last week (4/17).
- The price and projected yield are current as of 4/23/15.
- Proj Yield is the Morningstar “Projected Yield.” This represents the yield assuming that the latest dividend amount is maintained. This is a forward looking yield value. I like it for this evaluation because it more closely reflects the actual future yield (if all goes well).
- Total quality rating is the sum of the number (numeric) rating and the story rating.
- Industry group above is from the MSCI Global Industry Classification Standards (GICS).
Health Care Stocks – Final Candidates
For the final candidates, the next step is to review the current valuation of the stock. These valuations are based on prices at the close on 4/23/15. Valuation is a parameter that can change quickly, so I recommend you perform your own valuation prior to any decision or purchase, as the values can change quickly with price moves as well as news on stock performance. In all cases, you should do your own due diligence before making any purchase decision on any stock!
Health Care Sector – Final Candidates with Fair Value Ratings
| Company | Ticker | Price | Quality Rating | Story Rating | Total Rating | FAST FV Rating | MStar FV Rating | Overall FV Rating |
| Baxter International Inc | BAX | 71.51 | 42 | 3 | 45 | Poor | Good | Fair |
| Span-America Medical Systems | SPAN | 19.35 | 37 | 3 | 40 | Bubble | NR | Bubble |
Notes:
- The fair value rating was estimated with data current as of 4/22/15.
- I try to use an average of 2 fair value estimates for my overall rating. If the average is between ratings, I indicate the lower rating followed by a “+” sign.
- I source some of my information using SA Contributor Chuck Carnevale’s FAST graphs found here.
- My preferred inputs are the FAST fair value rating and the Morningstar fair value rating.
- The FAST fair value uses a 15x P/E valuation except for high growth stocks where it uses the growth rate as the factor.
- If needed, I use the S&P fair value rank from the Capital IQ Stock Report as the replacement if needed to provide a 2nd valuation. This is available under research for my brokerage account.
- In the case of only one fair value input, I just use that valuation.
- The basis of the ratings is noted below.
Fair Value Rating Key
| Rating | Morningstar & S&P IQ Ratings | Fast Ratings |
| Excellent | 5 points or stars | >3 bands or 30% under estimated fair value |
| Good | 4 points or stars | 1-3 bands or 10-30% under estimated fair value |
| Fair | 3 points or stars | +/- one band or +/-10% of fair value |
| Poor | 2 points or stars | 1-3 bands over or 10-30% over estimated fair value |
| Bubble | 1 point or star | >3 bands over or 30% over estimated fair value |
Materials Care Sector
Here are the Materials candidates from the end of 2014 candidate list. There are 5 candidates from the early January screen. Note this is a copy of the previously posted table, so the data reflects end of December 2014 data. The remainder of the article will have recent values.
Materials Candidates
| Company Name | Ticker Symbol | Industry | Div. Yield | Credit Rating | DGR 1-yr | DGR 3-yr |
| BHP Billiton Ltd. | BHP | Mining/Oil&Gas | 5.24 | A+ | 4.3 | 6.2 |
| BHP Billiton plc | BBL | Mining/Oil&Gas | 5.77 | A+ | 4.3 | 6.2 |
| Dow Chemical Company | DOW | Chemicals | 3.68 | BBB | 11.7 | 21.4 |
| International Paper Co. | IP | Packaging/Containers | 2.99 | BBB | 16.8 | 14.3 |
| Syngenta AG | SYT | Agriculture | 3.54 | A+ | 12.3 | 13.3 |
Notes:
- Industry group in the chart above is from SA Contributor David Fish’s CCC list found here.
- The yield and other values in this table are based on 12/31/14 yield values from the CCC list. Later values will be updated as noted.
Candidate List Ratings – Materials Sector
In the table below are the quality ratings for the stocks from above. Note that I have broken the total quality rating into 2 components for transparency. The number rating is the sum of the first 4 groups listed above, and is strictly numerical. The story rating is a score from 0-10 based on my read of the business, how it operates, the goals, the future, etc. This is just an opinion, but this is where I get to impact the rating with some personal thoughts/impressions. Basically, I research each company to get a feel about the business. A negative rating (by me) would disqualify the company (for my purchase). I include these two ratings separately so anyone who desires can update the story rating per personal review or adjust either rating for that matter. In fact, you should consider the story rating as a “due diligence” homework assignment and provide your own value. In the end, I use the total quality rating as the key selector to pick the final candidate list.
The blank row in the middle of the table represents my cut-off for the final list. For the Materials Sector, I had one stock rated higher than the others and the 3 remaining stocks all rated basically the same. So I decided to keep all 4 stocks.
Materials – Quality Rating
| Company | Ticker | Price | Proj Yield | 1 yr DGR | 3 yr DGR | 5 yr DGR | Sub-Industry | Quality Rating | Story Rating | Total Rating |
| Dow Chemical Company | DOW | 51 | 3.00 | 11.7 | 21.4 | 10.4 | Diversified Chemicals | 41 | 3 | 44 |
| BHP Billiton plc | BBL | 46.35 | 4.00 | 4.3 | 6.2 | 8.1 | Diversified Metals & Mi | 31 | 6 | 37 |
| International Paper Co | IP | 54.67 | 3.00 | 16.3 | 13.6 | 10.4 | Paper Products | 29 | 8 | 37 |
| BHP Billiton Ltd | BHP | 49.22 | 4.00 | 4.3 | 6.2 | 8.1 | Diversified Metals & Mi | 30 | 6 | 36 |
| Stocks above this line make the Final List, stocks below do not make the final list. | ||||||||||
| Syngenta AG | SYT | 69.53 | 3.00 | 12.3 | 13.3 | 16.2 | Materials | 27 | Dis-qual | NA |
Notes:
- The ratings were completed with data parameters gathered in the last week (4/17).
- The price and projected yield are current as of 4/23/15.
- Proj Yield is the Morningstar “Projected Yield.” This represents the yield assuming that the latest dividend amount is maintained. This is a forward looking yield value. I like it for this evaluation because it more closely reflects the actual future yield (if all goes well).
- Total quality rating is the sum of the number (numeric) rating and the story rating.
- Industry group above is from the MSCI Global Industry Classification Standards (GICS).
Stocks Removed (Disqualified):
For this industry group, there was 1 stock removed after working through the rating. Here is the reason this stock was removed from consideration:
- SYT was disqualified from consideration due to the Swiss ADR tax withholding requirements. For multiple reasons, I don’t feel it’s in my best interest to invest in these stocks. You can review SYT further if your situation is different.
Materials Stocks – Final Candidates
For the final candidates, the next step is to review the current valuation of the stock. These valuations are based on prices at the close on 4/23/15. Valuation is a parameter that can change quickly, so I recommend you perform your own valuation prior to any decision or purchase, as the values can change quickly with price moves as well as news on stock performance. In all cases, you should do your own due diligence before making any purchase decision on any stock!
Materials Sector – Final Candidates with Fair Value Ratings
| Company | Ticker | Price | Quality Rating | Story Rating | Total Rating | FAST FV Rating | MStar FV Rating | Overall FV Rating |
| Dow Chemical Company | DOW | 51 | 41 | 3 | 44 | Poor | Fair | Poor+ |
| BHP Billiton plc | BBL | 46.35 | 31 | 6 | 37 | Poor | Good | Fair |
| International Paper Co | IP | 54.67 | 29 | 8 | 37 | Fair | Fair | Fair |
| BHP Billiton Ltd | BHP | 49.22 | 30 | 6 | 36 | Fair | Good | Fair+ |
Notes:
- The fair value rating was estimated with data current as of 4/22/15.
- I try to use an average of 2 fair value estimates for my overall rating. If the average is between ratings, I indicate the lower rating followed by a “+” sign.
- I source some of my information using SA Contributor Chuck Carnevale’s FAST graphs found here.
- My preferred inputs are the FAST fair value rating and the Morningstar fair value rating.
- The FAST fair value uses a 15x P/E valuation except for high growth stocks where it uses the growth rate as the factor.
- If needed, I use the S&P fair value rank from the Capital IQ Stock Report as the replacement if needed to provide a 2nd valuation. This is available under research for my brokerage account.
- In the case of only one fair value input, I just use that valuation.
- The basis of the ratings is noted below.
Fair Value Rating Key
| Rating | Morningstar & S&P IQ Ratings | Fast Ratings |
| Excellent | 5 points or stars | >3 bands or 30% under estimated fair value |
| Good | 4 points or stars | 1-3 bands or 10-30% under estimated fair value |
| Fair | 3 points or stars | +/- one band or +/-10% of fair value |
| Poor | 2 points or stars | 1-3 bands over or 10-30% over estimated fair value |
| Bubble | 1 point or star | >3 bands over or 30% over estimated fair value |
Summary/Conclusions – Health Care and Materials Sectors
With only 6 stocks being selected, we still have 4 stocks that came up as possible near-term buy candidates. Only one was from Health Care, but Materials had several candidates. However, BBL and BHP are really different ways to own the same company, so maybe we only count 3 possibilities. Remember that my primary goal is to find high quality first, and then use that list to pick stocks based on both Quality and Valuation.
I have only 2 more sectors to review to complete my candidate list, so I hope to have the list complete in the next 3 or 4 weeks. The goal is to establish a list of high-quality dividend growth stocks for possible purchase throughout 2015 and a start to the list for 2016. At this point, I have reviewed 65% of the candidates (85) and selected 48 stocks for the Final 2015 Candidate List. With Financials (large number of candidates) and Utilities remaining, there is a still a good amount of work to complete. Thanks for reading and please feel free to ask any questions or provide any comments / suggestions you have. And thanks for your patience as I work through this effort over several months.
One last note, here is a quick list of the 48 stocks selected to date with Morningstar “projected yields” as of 4/23/15. Good luck in your future investing.
2015 DGI Candidate List (Partial)
| Company Name | Ticker Symbol | Industry | Div. Yield | Sector |
| Cracker Barrel Old Country | CBRL | Restaurants | 2.83 | Consumer Discretionary |
| Diageo plc | DEO | Beverages-Alcoholic | 3.03 | Consumer Discretionary |
| Hasbro Inc. | HAS | Recreation | 2.57 | Consumer Discretionary |
| McDonald’s Corp. | MCD | Restaurants | 3.51 | Consumer Discretionary |
| Meredith Corp. | MDP | Publishing | 3.35 | Consumer Discretionary |
| Target Corp. | TGT | Retail-Discount | 2.54 | Consumer Discretionary |
| Altria Group Inc. | MO | Tobacco | 3.97 | Consumer Staples |
| British American Tobacco plc | BTI | Tobacco | 4.09 | Consumer Staples |
| Clorox Company | CLX | Cleaning Products | 2.71 | Consumer Staples |
| Coca-Cola Company | KO | Beverages-Non-alcoholic | 3.22 | Consumer Staples |
| General Mills | GIS | Food Processing | 3.13 | Consumer Staples |
| Kimberly-Clark Corp. | KMB | Personal Products | 3.15 | Consumer Staples |
| PepsiCo Inc. | PEP | Beverages/Snack Food | 2.74 | Consumer Staples |
| Philip Morris International | PM | Tobacco | 4.79 | Consumer Staples |
| Procter & Gamble Co. | PG | Consumer Products | 3.28 | Consumer Staples |
| Reynolds American Inc. | RAI | Tobacco | 3.48 | Consumer Staples |
| Alliance Holdings GP LP | AHGP | MLP-Coal | 7.24 | Energy |
| Alliance Resource Partners LP | ARLP | MLP-Coal | 7.89 | Energy |
| DCP Midstream Partners LP | DPM | MLP-Natural Gas | 7.73 | Energy |
| ONEOK Partners LP | OKS | MLP-Oil&Gas Pipelines | 7.51 | Energy |
| Plains All American Pipeline LP | PAA | MLP-Oil&Gas Pipelines | 5.35 | Energy |
| Spectra Energy Partners LP | SEP | MLP-Oil&Gas Pipelines | 4.41 | Energy |
| Williams Partners LP | WPZ | MLP-Oil&Gas Pipelines | 6.75 | Energy |
| Chevron Corp. | CVX | Oil & Gas | 3.89 | Energy |
| ConocoPhillips | COP | Oil & Gas | 4.28 | Energy |
| ExxonMobil Corp. | XOM | Oil & Gas | 3.15 | Energy |
| Helmerich & Payne Inc. | HP | Oil & Gas | 3.65 | Energy |
| National Oilwell Varco Inc. | NOV | Oil&Gas Equipment | 3.30 | Energy |
| Suncor Energy Inc. | SU | Oil&Gas | 2.71 | Energy |
| Baxter International Inc. | BAX | Drugs | 2.91 | Health Care |
| Span-America Medical Systems | SPAN | Medical Equipment | 2.99 | Health Care |
| Caterpillar Inc. | CAT | Industrial Equipment | 3.30 | Industrials |
| Deere & Company | DE | Farm Equipment | 2.71 | Industrials |
| Eaton Corp. plc | ETN | Machinery | 3.18 | Industrials |
| Emerson Electric | EMR | Industrial Equipment | 3.23 | Industrials |
| General Electric Co. | GE | Conglomerate | 3.43 | Industrials |
| Lockheed Martin | LMT | Aerospace/Defense | 3.04 | Industrials |
| TAL International Group Inc. | TAL | Rental/Leasing Services | 6.89 | Industrials |
| Daktronics Inc. | DAKT | Electronics | 3.61 | Information Tech |
| KLA-Tencor Corp. | KLAC | Technology-Hardware | 3.34 | Information Tech |
| Maxim Integrated Products | MXIM | Technology-Hardware | 3.22 | Information Tech |
| Cisco | CSCO | Telecomm-Equipment | 2.93 | Information Tech |
| BHP Billiton Ltd. | BHP | Mining/Oil&Gas | 5.04 | Materials |
| BHP Billiton plc | BBL | Mining/Oil&Gas | 5.35 | Materials |
| Dow Chemical Company | DOW | Chemicals | 3.29 | Materials |
| International Paper Co. | IP | Packaging/Containers | 3.03 | Materials |
| AT&T Inc. | T | Telecommunications | 5.49 | Telecommunications |
| Verizon Communications | VZ | Telecommunications | 4.40 | Telecommunications |
Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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