Thursday, April 24, 2008

* Measure What's Important

If you really want to know what is important to a person, you don't ask the person. Instead, you watch what they do. This will reveal where their heart truly lies. Attached is a PDF copy of my Excel Dashboard that I use to track stocks. I consider each of the metrics on here important, but which do I consider the most important?

In determining which piece of information I consider most important, the answer lies in my actions. Each time I look at this tab, I automatically sort the stocks by the "NPV MMA Diff." column. Upon reflecting on this, I determined that "NPV MMA Diff." is what I consider to be the most important piece of information.

As a reminder, "NPV MMA Diff." is based on a hypothetical $1,000 investment in a stock and a $1,000 investment in a money market account (MMA) earning a pre-defined rate. The value calculated is the net present value (NPV) of the difference between the dividend earnings of this
investment and the interest income from the MMA over 20 years. Other assumptions include:
1. Dividends grow at the Dividend Growth Rate
2. Dividends are reinvested
3. Share price appreciation is not considered
4. Interest income is reinvested in the MMA
If you are interested in seeing how "NPV MMA Diff." is calculated, I will refer you to my DF4-PreScreen.xls model on the Tools page.

Looking at the PDF, you will see four stocks have "NPV MMA Diff." values in excess of $100,000. This is a "too good to be true" situation where the market has discounted the these stocks for some reason. Here is my speculation looking at them individually:
  1. SFI - This is a finance company focused on the commercial real estate industry. With "finance company" and "real estate" in the description, this company has taken a double hit. I suspect the market has priced a significant economic hit and a dividend cut into SFI. With a 19% yield, if the market is wrong someone will make a lot of money. I consider this to be my most risky stock.
  2. RY - The market does not believe RY can continue to grow its dividend at a 20+% rate. I agree. Using my DF4-PreScreen.xls to run some scenarios I found that to get the $10,000 "NPV MMA Diff." I like to see, RY will have to grow its dividend at 9.1%. An anemic growth rate of 2.8% will get it to $1,000 of "NPV MMA Diff." I am not overly concerned with RY.
  3. ACAS - The market believes that ACAS cannot continue to pay a 12% dividend and grow it at 7+%. Maybe it can't, but for the last 10-years it has proved the market wrong. I characterize ACAS as a risky stock - but I am still buying as my allocations allow.
  4. HD - Historically HD has raised it dividend at 20+%. those days are gone. Its dividend has been flat for six straight quarters. Using my DF4-PreScreen.xls to run some scenarios, I found that to get the $10,000 "NPV MMA Diff." I like to see, HD will have to grow its dividend at 12.3%. It will take a 6.6% growth rate to get $1,000 of "NPV MMA Diff." HD is in trouble, that is why I have put it "on the shelf".
Moving to the other end of the list. Here is my speculation on the bottom four:
  1. WMT - A recent 8% dividend increase was not enough to keep the "NPV MMA Diff." from going negative. I am hoping WMT will return to its double-digit dividend increase in the future, but until then, it is "on the shelf".
  2. HCP - With a $1,692 "NPV MMA Diff." driven by a 4.8% yield and a 1.8% growth rate, this stock is a yawner. It is a steady performer, but its performance doesn't leave much room for error.
  3. JNJ - Your classic dividend stock. With a $2,443 "NPV MMA Diff." driven by a 2.5% yield and a 11.0% growth rate, there is not much room for error. But that's ok, JNJ historically hasn't made a lot of errors.
  4. ED - Classic utility - good dividend yield of 5.6% with an anemic 0.9% growth rate. I will continue to buy for diversification reasons as my allocation allows.
Ahhh... you got to love that "NPV MMA Diff." metric!

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