Weekly Watchlist - Week of June 22, 2020

We are nearing the end of June, and I've started putting together a dividend stock watchlist on a weekly basis now with all the uncertainty that is going on in the market. So I thought, why not share my thoughts? Below I've compiled my method of identifying potentially undervalued dividend growth stocks, which are the core holdings of my stock portfolio. 

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Without further adieu, here's the first installment of my weekly watchlist series of posts. As a note, all stock metrics noted below in this post are as of market close on Friday, June 19, 2020. 

The Criteria

To arrive at my watchlist, I first gathered a listing of the dividend aristocrats and dividend kings. For anyone who does not know what that means, a dividend aristocrat is a stock in the S&P 500 that has increased their dividend each year, for at least 25 consecutive years. A dividend king has done the same over a 50+ year period, though dividend kings do not have to be included in the S&P 500. 

After combining these two lists, I exported data from yahoo finance, and began performing filters in excel for the following criteria:

• P/E Ratio below 25
• Dividend Yield above 3%
• Current Ratio above 1
• Payout Ratio below 50%

After identifying all the stocks that met this criteria, I then began examining the 5 year average dividend yield, looking for stocks that currently have a higher yield than this metric. I also examined the 3 and 5 year dividend increase history, and looked for stocks that had average increases above inflation (estimated at 3%). 

After running all these filters, only 3 stocks remained. 

The Stocks

I have three stocks on my watchlist this week, each of which I will summarize below. 

Stock #1: AbbVie Inc. ($ABBV)

AbbVie has been on my watchlist (and my purchase history) for quite some time now. The company has recently had quite a run from the low 60s in late March, but the metrics are still attractive, and the company's recent merger with pharmaceutical Allergan could spark earnings growth into the future. 

Where the stock is currently priced, at $96.71, the yield is robust at 4.54%. The P/E is very low, at only 9x analyst estimate earnings for this year, 3 and 5 year dividend growth has averaged 23% and 20%, respectively, and there is plenty of room for dividend growth with a payout ratio of only 37%. Further, a current ratio of over 3 provides plenty of safety and liquidity to pay down debt should anything affect earnings in the short term. 

Given I've been adding to my position in the stock for quite a while now, I'll likely only be adding to this position significantly if prices drop, either in the stock specifically, or in the overall market, as it currently makes up one of my larger positions. 

Stock #2: Cardinal Health Inc. ($CAH)

Cardinal Health is another company who has recovered from the March lows to trade at January's levels, but the metrics still show that there's a potential that the stock is still undervalued. Trading at $53.81, the company's forward P/E is under 10 and the yield is 3.57%. Though the recent dividend growth isn't as high as AbbVie's, it has outpaced inflation over a 5 year period at an average of just over 7%.

However, the company's 3 year average dividend growth drops off significantly to only 2.3%, and the company has a high debt load, with a debt to equity of nearly 6.5. The current ratio, though, is still above 1, which provides short term debt safety. Further, the payout ratio of only 35% provides plenty of cushion for the company to put their earnings to work paying down debt, which I would like to see from the company in such a low rate environment. 

Stock #3: Archer Daniels Midland ($ADM)

The last stock on my watchlist this week is Archer Daniels Midland. The stock has mostly traded sideways over the last couple years, as the company's operations had been plagued by harsh weather conditions, natural disasters, and depressed ag-commodity pricing in 2019, and COVID-related supply chain disruptions in 2020 thus far. Often it seems the company can't catch a break. But even so, the company provides agricultural products and services that are always in demand. Because of this, I have already built up a large position in the stock over the past year, and every time I see the price hover around the $40 mark, I am interested. 

This time is no different, as the stock is priced at $40.24. At this price, the dividend yield is 3.5% and the forward P/E is just over 12. Dividend growth has been steady with a 3 year average of 4.6% and a 5 year average of 6.5%, and the payout ratio of 42% leaves room to keep this growth going. In my eyes, this company is a no-brainer, and the market seems to be undervaluing it. If the price does indeed dip below $40, I will be looking to add more to my position. 

Summary

As you can see, my stock watchlist is very metric-driven, rather than based on the latest 'in' stocks that the market seems to decide on an everyday basis. To me, it always helps to block out the noise, and dig through some data to find some hidden gems. 

In my next post, I will keep you all updated on any purchases that I made, and who knows - maybe there will be a few of the stocks above listed. 

Are there any stocks on your watchlist you think I've missed? Drop a comment below!