Quick Dividend Check
What is the recent dividend history? If there are lots of cuts or missed payments, highly likely this will not be a dividend growth company anytime soon.
How long have dividends been increasing? Was there a cut within the last 10 years and why?
What is the TTM Free Cash Flow payout ratio, (Dividends Paid / Free Cash Flow). Is this under 70%? What is the FCF payout ratio trend the last few years?
If these look promising, it’s time to move on to determine if this is a company with a durable competitive advantage.
Durable Competitive Analysis tool
#1 – Are they earning revenue?
#2 – Is the gross profit margin consistently over 40%?
(Gross Profit $7,000 / Revenue $10,000 = G.P.M. 70%)
#3 – Is Selling, General and Administrative consistent? The lower the better – anything under 30% is fantastic.
(SGA $3,000 / Gross Profit $6,000 = 50%)
#4 – Is research & development a high percentage of gross profit? If “YES”, this is a long term risk. The lower R&D spend the better.
#5 – What is the depreciation cost as a percent of gross profit?
The lower the better.
#6 – Is interest expense consistent? Is it less than 15% of operating income?
#7 – Are net earnings trends consistently upward over time? Ideally we want net earnings (net margin) to be more than 20% on total revenue. Under 10% = highly competitive business, 10%-20% = potentially undiscovered long term investment.
#8 – Is the EPS on an upward trajectory over a ten year period
#9 – Is the Interest Coverage Ratio (ICR) over 5 – Check here
#10 – What percentage of debt is retained earnings?
#11 – Are net income and earnings rising together? Inventory spikes can mean highly competitive business.
#12 – Is net PP&E consistent? Too much = spending to keep up with the joneses.
#13 – Is goodwill increasing? Yes = paying up for businesses. No = not buying businesses or buying under book value.
#14 – Return on Assets %? Divide net earnings by total assets. Over 5% good, over 20% excellent.
#15 – Can net earnings pay off long term debt within a three or four year earnings period? What is this number?
#16 – Adjusted Debt to Equity Ratio = (Shareholder Equity + Treasury Stock / Total Liabilities). Should be below 80% (lower the better), otherwise the company is using debt to finance their operations. Does not apply to financial institutions.
#17 – Do they have preferred stock? DCA companies tend not to.
#18 – Are retained earnings growing?
#19 – What is the return on shareholders equity? (Net earnings / shareholders’ equity) – the higher the better. Sometimes strong companies shareholder equity is negative, check for strong history of net earnings.
Cash Flow Statement
#20 – What is the Capital Expenditure in relation to Net Earnings (CapEx / Net Earnings)? Under 50% is ideal, under 25% fantastic.
#21 – Are they consistently buying back shares?
#22 – Simply wall street “fair value”?
#23 – Is the current P/E under 40? Strongly consider selling when P/E’s go over 40.
If most of these look good, there’s a strong probability that this is a company with a durable competitive advantage.