TDO Investment Process STEP 4 – Technical Evaluation

TDO valuationThis is the fourth in a series of articles elaborating on The Dividend Observer Investment Process.

I want things to be simple. Hence, I am simply tracking the simple data from each company to assess the value. As I gather information, ideas, and experiences over the years, I build a simple formula and weighted to arrive at a composite score and simply called it as the dividend observer score or TDO score. The idea is to focus on the best scoring companies, meaning the higher the value, the higher our interest should be in that company. In the future, I will publish regularly  the list of stocks having the best TDO score. This method however has not yet been proven for profit consistency, so I encourage you to do your due diligence before investing your hard earned money.  Here’s an overview of what I am tracking.

Primary Factor (30%)

  • Payout Value – This is the dividend payout ratio value based on a 50% target. This is the most important factor to determine how well the company is retaining a portion of its earnings to meet its financing requirements in the future. If a high payout ratio is continually sustained that could be a signal that the company is looking to cut the dividend to get it under control. A low payout ratio on the other hand may suggest that the company is retaining a higher portion of its earnings which may result in higher dividend payouts in the future.

Major Factor (40%)

  • Interest Value – This will measure the ability of the company to make the interest payments on its entire debt. Companies with lots of debt may struggle to pay the dividend if business conditions worsen. I prefer a ratio of at least 5 and avoid if ratio is below 2.
  • Dividend Growth Value – I prefer a company that has at least 10% dividend growth rate in the last three years. Companies that have a history of raising their dividend on a regular basis tend to continue to do so.
  • Book Value – I prefer a company that has at least 10% growth of book value in the last three years. This is to check the company’s balance-sheet quality.
  • Range Value – This is the ratio of the 52-Week Range to highlight the stock price position. Price drop may offer a buying opportunity however you must understand why the stock price is going down and note that weak share price movements can often anticipate dividend cuts.

Minor Factor (30%)

  • Cash flow to Net Income – Cash is needed to pay the dividend and net income is the primary source to fund the dividends. I prefer a 10:1 ratio.
  • Cash Flow Growth – I focus on companies that have a record of increasing cash flows on regular basis, at least 10% growth in the last three years.
  • Earnings Growth – I prefer a company with a history of increasing earnings, at least 10% growth in the last three years.
  • Dividend Yield Value – I prefer my entry yield at 3.50%.
  • P/E Value – I am looking for a company with P/E ratio in between 7 to 20, though a value of 15 is my preference.

 Below is a screen shot of my monitoring worksheet.

 TDO Value Mining

Some cell is highlighted (colored) automatically to quickly visualize that it has passed my minimum requirements and this will alert me to focus on that stock to do further research to see if they are worth investing.

That’s it for now. How about you? How do you evaluate the stock you plan to invest?

Thank you for reading and looking forward to our success in all our endeavor!

All the best in your investing journey!

Be the first to comment on "TDO Investment Process STEP 4 – Technical Evaluation"

Leave a Reply

%d bloggers like this: