As I track my various dividend holdings, I am always looking for entry points. Gotta spend that dry-powder every now and then, right? I use a set of signals to help me decide what fair value for a dividend stock should be. Intuitively, if current price is below what I think fair value should be, it’s time to dig deeper. When looking at Intel (INTC), certain signals suggest it’s time for me to consider buying again.
- Intel is trading below fair market value.
- Pro’s: Price, Payout Ratio, Sales Growth, P/E.
- Con’s: Chowder (Yield + CAGR), EPS
- Consider Buying: $49.84
- Fair Value:$52.46
- Consider Selling: $62.96
- Current Price: $45.42 <<< Hello!
Different Valuation Methods – Analysis Part 1
Using different data elements and ratios, I calculate or research what a fair price for the stock would be. I then assign a weighting value to each method and come up with an aggregate fair price.
Dividend Yield Method:
- Stock Price = Current Dividend / (Current Dividend Yield * (1 + 5-Year Dividend CAGR))
- $1.20 / (2.6% * (1 + 4.4%)) = $43.72
- Note: CAGR means Compound Annual Growth Rate.
- Stock Price = Future EPS * Current P/E
- 4.23 * 16.40 = $69.73
- Stock Price = Current PEG Ratio * Current P/E
- 1.20 * 16.40 = $19.68
- Future Dividend Amount / (Historical Rate-of-Return – 5-Year Dividend CAGR)
- $1.25 / (14% – 4.4%) = $13.01
Change in EPS and P/E Method:
- (Change in EPS * Change in P/E) + Current Price
- (1.46 * -6.1) + $45.42 = $36.51
Morningstar’s Fair Value:
- If you don’t have a subscription, you can find the value by using the resources of your local public library– many of which provide you with a link after logging in with your library card.
Professional Analyst Price Targets:
- Currently, I am getting this value from MarketWatch.com > Analyst Estimates > Average Target Price.
Aggregate Fair Value:
- This is the final stock price value I use to determine if the price is inline with, above, or below current market price. Instead of an average of all the values above, I just use separate weights for each measure when coming up with a final value.
Quality Signals – Analysis Part 2
Price is a large factor in my buy decision (shown in Part 1 above), but I also look at various other buy signals. I weight each signal, based on my opinion of what is most important to me, and come up with an aggregate buy score (0-100%). The higher the score, the stronger the buy signal. Anything above 60% warrants my consideration.
- Price is at least 5% below fair market value (covered in Part 1 above) : YES
- Dividend Payout Ratio <= 60 : YES
- Dividend Yield + 5-Year Dividend CAGR (“Chowder” ratio) >= 12% : NO (it’s 7%)
- 5-Year EPS CAGR Growth Rate >= 1% : YES (just barely)
- 5-Year Sales Growth Rate >= 1% : YES
- P/E <= 20 : YES
I add a weighting I have defined for each of these signals and then transform those binary values (yes or no) into a 0-100% scale. 0% = lowest possible buy signal, 100% = highest possible buy signal.
For INTC, this current comes out to 80%.
My Dividend Investing portfolio is slightly underweight on Technology stocks, so I have been looking to boost that. Intel is currently trading at what I believe is well below fair market value. Buy signals give it a score of 80% (indicates positive quality). Both of these together indicate I should give strong consideration to buying more shares for my portfolio. Obviously I will need to take into consideration non-financial topics, such as criticism of Intel’s current leadership, chip market saturation (demand issues), etc. (but that’s all for another article).
 Pic: https://en.wikipedia.org/wiki/Intel