TDO Investment Process STEP 2 – Stock Screening rev1

STOCK SCREENER

Last year, I made a series of articles elaborating on The Dividend Observer Investment Process. After years of observing how the stock market is working through the consistent interaction with fellow investors/traders in facebook groups, stock market forum, reading articles published from one of the leading analysts in the Philippines, like the Pinoy Investor and the  Truly Rich Club, I realize to make an amendment on my STOCK Screening process to improve my decisions to pick the particular stock over the other (you can read my previous Stock Screening Process in this link).

Since I started joining in the world of Stock market investing, I maintain the records of dividend stock in an excel file – as my database. I keep updating this database quarterly. Using simple calculation in my database, I generate my first level of STOCKS to be in my watchlist. These are the stocks with potential for an investment. 

HOW DO I SELECT STOCK TO BE INCLUDED IN MY WATCH LIST?

Establishing and maintaining a successful dividend portfolio requires investors to develop — and consistently apply — a sound methodology of stock selection.

A high dividend yield does not necessarily make a good dividend stock. Selecting stocks based on this criterion alone is an impulsive strategy. A good stock to “buy” should provide ownership of a company that:

  1. Pays a significant and sustainable dividend;
  2. Re-invests significant capital;
  3. Has a healthy balance sheet;
  4. Shows consistent revenue growth; and
  5. Is priced at a reasonable level.

Given these five components, the following metrics (must be combined with other metrics to ascertain the quality of stock) are my starting point in stock selection.

  1. Dividend Yield. ​A stock’s dividend yield measures the percentage of a stock’s price that is paid in dividends every year. It is calculated by dividing a stock’s annual dividend per share by the share price. A high dividend yield is favorable considering other factors being equal. But dividend yield alone does not tell the full story. An extremely high dividend yield can often be a red flag, which is why the other metrics below are also important to consider.
  2. Payout Ratio. A stock’s payout ratio measures the percentage of a stock’s yearly earnings that are paid in dividends every year. It is calculated by dividing a stock’s annual dividend per share by earnings per share. All other factors being equal, a low payout ratio is favorable, as it indicates that management is likely reinvesting capital in the business through share buybacks, capital expenditures, debt paydowns, or acquisitions. These activities are typical of a healthy company that can increase its earnings — and dividend payments — over time.
  3. Debt-to-Equity Ratio. ​A stock’s debt-to-equity ratio is a good measure of the financial health of a company’s balance sheet. It is calculated by dividing total liabilities by shareholders’ equity. A high debt-to-equity ratio indicates that the company is highly leveraged, which can be a red flag. In fact, when a company’s debt is out of control, it often ceases paying a dividend altogether; the dividend cancellation then frees up cash to pay down excess debt. Thus all other factors being equal, a low debt-to-equity ratio is favorable.
  4. Revenue Growth. ​A stock’s revenue growth measures the amount that sales and/or revenues have grown (or shrunk) over time; it’s usually measured over a period of one or more years. (Due to my database constraint, I use to measure the three years growth.) Revenue growth may be more indicative of a company’s financial health than earnings growth, since the revenue number — versus the earnings number — is less easily manipulated by creative accounting practices in financial statements. All other factors being equal, a high revenue growth rate is favorable, as it indicates that the company has a proven track record of growth.
  5. P/E ratio. The price-to-earnings ratio is a measure of a stock’s value and can convey the attractiveness of a stock’s share price. It is calculated by dividing price by earnings per share. A high P/E ratio indicates an expensive stock, while a low P/E ratio indicates a cheap stock. All other factors being equal, a low P/E ratio is favorable.

So, What are the PSE Stocks that currently pass the TDO Stock Screener?

Base on the above metrics (plus additional metrics like Graham Number, Price-to-Book Value, etc.), only 22 out of 250+ PSE stocks passed our initial criteria. I sorted out these stocks base on the TDO Score results. TDO Score is my experimental composite score on the metrics above with the idea to focus on the best scoring companies, meaning the higher the value, the higher our interest should be in that company.

Below are the Stocks with TDO score above 50%:

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Note that this screener is most useful for long term investing. In addition, the stocks listed above does not necessarily mean a good stocks to invest at this moment. Further research still needs to be done and right timing to invest still to be determine to maximize profits.

How do you find the stocks included in my screener? Is it included in your watch lists?

May you find this article useful. Thank you for reading.

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