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Monday, August 11, 2008

Stock Analysis: Stanley Works (SWK)

This article originally appeared on The DIV-Net August 4, 2008.

Linked here is a PDF copy of my detailed analysis of Stanley Works (SWK) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: Stanley Works is a worldwide producer of tools, hardware and specialty hardware for home improvement, consumer, industrial and professional use.
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Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
SWK is trading at a discount to only 3.) above. Since SWK's tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuation and average the remaining two, SWK is trading at a 16.1% premium. SWK had a Star deducted for trading at a premium in excess of 5%.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
SWK earned one Star in this section for 3.) above. SWK has paid a cash dividend to shareholders every year since 1877 and has increased its dividend payments for 41 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to >MMA
SWK earned no Stars in this section, and had one Star deducted for a negative NPV MMA Diff. The negative NPV MMA Diff. means that on a NPV basis for every $1,000 invested in SWK you would earn $2,013 less than a MMA earning a 20-year average rate of 4.61%. If SWK grows its dividend at 3.3% per year, it will never equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: SWK is both an S&P 500 Dividend Aristocrat and a member of The Broad Dividend Achievers™ Index. Though SWK has a strong brand name and is well positioned versus it competitors, SWK is is experiencing a cyclical downturn from a weak housing market and slowing U.S. economy. Overseas growth has been able to partially offset this downturn.

Conclusion: SWK lost a Star in the Fair Value section, earned a Star in the Dividend Analytical Data section and lost a Star in the Dividend Income vs. MMA section for a net total of -1 Stars. Since my scale bottoms out at zero, this quantitatively rates SWK as a 0 Star-Avoid stock.

Using my D4L-PreScreen.xls model, I determined the share price would have to drop to $26.32 before SWK's NPV MMA Diff. increases to the $3,000 NPV MMA Diff. I like to see. At that price SWK would yield 4.79%. Given SWK's current valuation, I will not be purchasing shares anytime soon.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I do not own shares of SWK (0.0% of my Income Portfolio).

What are your thoughts on SWK?


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Wednesday, August 6, 2008

Stock Analysis: M&T Bank Corporation (MTB)

Linked here is a PDF copy of my detailed analysis of M&T Bank Corporation (MTB) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: M&T Bank Corporation operates as the holding company for M&T Bank and M&T Bank, National Association, which provides commercial and retail banking services.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
MTB is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuation and average the remaining two, MTB is trading at a 8.0% discount. MTB earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
MTB earned one Star in this section for 3.) above. MTB has paid a cash dividend to shareholders every year since 1979 and has increased its dividend payments for 25+ consecutive years. Last year's dividend payout was 44%, up from 31% in 2006. Since the increase was in excess of 15 points, a Star is deducted, leaving a net of zero Stars in this section.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to >MMA
MTB earned both of the available Stars in this section. The NPV MMA Diff. of the $5,590 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as MTB has. If MTB grows its dividend at 7.7% per year, it will take 4 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%. MTB earned a Star since its Years to >MMA of 4 is less than 5 years.

Other: MTB is both an S&P 500 Dividend Aristocrat and a member of The Broad Dividend Achievers™ Index. MTB's loan portfolio has a history of profitability and is considered to have good credit quality. The company operates in a highly competitive and fragmented industry, but
is able to produce relatively stable financial results. As assets reprice at lower rates,
MTB's net interest margin will come under pressure in 2008. Some analysts believe that MB will have to take an impairment charge on its 20% stake in BayView Lending, a commercial lender
that securitizes loans.
BayView Lending earnings have been declining.

Conclusion: MTB earned a Star in the Fair Value section, earned a net of zero Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of 3 Stars. This quantitatively rates MTB as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price could go up to $81.65 before MTB's NPV MMA Diff. drops to the $3,000 NPV MMA Diff. I like to see. At that price MTP would yield 3.43%. I placed MTB "On The Shelf" earlier this year. In effect, I am not making any additional purchases until MTB proves itself to be a worthy investment or as a stock that needs to be sold. To date, I have seen nothing that change this classification.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I owned shares of MTB (0.9% of my Income Portfolio).

What are your thoughts on MTB?


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Tuesday, August 5, 2008

There is Value to be Found in the P/B Ratio

These are the days that value and dividend investors long for. There have been times in the past where I struggled to find stocks worthy of purchasing. Now, the challenge is to pick the best available stocks that will maximize my chances of future success.

When looking for value priced stocks, the Price-To-Book (P/B) ratio is one that I like to focus on. It is calculated as share price divided by book value per share. Book value is most often calculated as Assets less Liabilities. However, some people conservatively calculate book value as Assets less Intangibles less Liabilities. I prefer the latter since it excludes goodwill and other intangibles which would be difficult to recover in a liquidation.

A low P/B ratio could indicate a stock is undervalued. Since GAAP accounting is mostly based on historical cost, a viable growing company will normally be worth more than its book value. However, there are times when good companies will be punished along with the bad. It is our job as investors to separate the good companies from those that have fundamental problems.

Fortunately, online stock screens make searching through a large number of companies quite simple. This MSN stock screen will identify companies in the S&P 500 with a P/B less than 1 and a dividend yield >3% (MSN screen will likely only work in Internet Explorer):

D4L-Cheap Dividend Stocks
Criteria:
- S&p 500 Member
- Current Dividend Yield >= 3%
- Price/Book <= 1
The screen produced 21 stocks on 8/3/2008 when I ran it. Some such as Fannie Mae (FNM) were stocks with obvious fundamental problems and not worthy of additional evaluation. Here are 8 familiar names I pulled from the list:
Company (Symbol), Price/Book, Yield
CBS (CBS), 0.50, 6.76%
Lehman Brothers (LEH), 0.53, 3.65%
Capital One Financial (COF), 0.63, 3.61%
American Capital (ACAS), 0.72, 20.35%
Cincinnati Financial Corp (CINF), 0.83, 5.61%
Amer International Group (AIG) 0.84, 3.29%
SunTrust Banks (STI), 0.85, 7.33%
NiSource Inc (NI), 0.91, 5.49%

This screen is not a buy list, but something to be used to identify stocks that could potentially be a value play. Remember, when stocks go on sale, it is only a good deal when the value you receive is greater than the price you pay!

(Photo: sanja gjenero)

Full Disclosure: Long in ACAS and STI


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