When I’m deciding which shares to buy or sell I always start by looking at the company’s rank on my unique defensive value stock screen.
The screen covers more than 200 FTSE All-Share companies, each with a ten-year unbroken record of dividend payments.
It is also used as the first step in deciding which shares to add to or remove from the model portfolio (the second step is a series of probing questions designed to find out if the company is a potential value trap and if it has any competitive advantages).
The stock screen ranks stocks by a combination of five factors:
- Growth Rate – How fast a company has grown over ten years
- Growth Quality – How consistently a company has grown over ten years
- Profitability – How profitable a company has been over ten years
- PE10 ratio – The share price to ten-year average earnings ratio
- PD10 ratio – The share price to ten-year average dividend ratio
If you want to find out exactly how each of those factors is calculated have a look at the free resources page. There are worksheets and spreadsheets which enable you to calculate each factor for any company by hand. It also includes a worksheet of the company analysis questions mentioned above.
Interactive online stock screen
Subscribers also have access to an interactive online version of the stock screen.
With the online screen you can sort the list of over 200 companies by dividend yield, Growth Rate, Profitability or any of the five factors above.
You can also restrict the list by selecting those shares that have – for example – dividend yields above 4%, Growth Rates above 5% and Profitability above 15%.
Once you’ve sorted and selected the stocks to your personal criteria you can then download the underlying data to a spreadsheet for further analysis.
Using the stock screen
The screen is built using the same data as the screen in the newsletter. It is updated after the market closes each Friday (either Friday evening or Saturday morning) using the latest end of week data.
- Colour coding: Green = better than FTSE 100. Light red = worse than FTSE 100. Dark red = unacceptably high or low.
- Debt Ratio colour coding: Light red = above 4 (max for cyclical sector companies). Dark red = above 5 (max for defensive sector companies).
- Sort: Click on a column header to sort (ascending or descending)
- Select: Use the selection tools at the bottom of the table to restrict the data to a particular range. For example, if you only wanted to view shares that were better than the FTSE 100 on every measure you would enter the FTSE 100’s current Rank into the Rank “to” field, its Yield into the related “from” field, PE10 into the “to” field, Growth into the “from” field, Quality into the “from” field and 5 into the Debt “to” field (because shares with a Debt Ratio of more than 5 are generally excluded from the model portfolio).
- Download: You can download data in various formats. If you sort and select the data first, your download will match your sort and select criteria. Some members have had problems with the Excel download; using the COPY option is the most reliable approach. Just create a new spreadsheet or worksheet and copy the data into it. You’ll also need to delete the last row from your spreadsheet as it will contain some meta data that you won’t want.
- Column notes:
- Rank: The company’s rank on the screen, with 1 being the highest rank. The rank is calculated by sorting all of the companies on the screen by each factor (Growth, Quality, PE10, PD10, ROC), creating a rank for each factor and then adding those individual ranks together.
- Price: The share price in £.
- PE: The price to earnings ratio. This is included just for information and doesn’t form part of the ranking calculation.
- Yield: The historic dividend yield. This is included for information only and doesn’t form part of the Rank calculation. Instead, each company’s Rank is based on PD10, the ratio between the current share price and the average dividend paid over the past 10 years.
- PE10: The ratio between the current share price and the company’s average adjusted earnings per share over the past 10 years. This is used in the Rank calculation.
- Growth: Growth Rate. This is used in the Rank calculation. It is the average growth of revenues, earnings and dividends where growth in each is measured as the annualised growth of a 3-year rolling average over the past 7 years.
- Quality: Growth Quality. This is used in the Rank calculation. It is the percentage of times that a profit has been made, and that revenues, earnings and dividends have increased, measured over the past decade.
- Net Prof.: Net Profitability. This is used in the Rank calculation. It is measured as the median net (i.e. post-tax) profitability over the last decade. Profitability is measured either using return on capital employed (ROCE) for non-financial companies, or return on equity (ROE) for financial companies. The calculation for each year is:
- For non-financial companies: Adjusted profit after tax / (fixed assets + working capital)
- For financial companies (banks and insurance companies): Adjusted profit after tax / shareholders’ equity
- Debt: Debt Ratio – The ratio between a company’s total borrowings (total interest bearing debt) and its Current Earnings Power (CEP). Provides a rough guide to a company’s ability to carry its debts in good times and bad. For:
- Banks – The Debt Ratio is not applicable (N/A). Other metrics such as the Common Equity Tier 1 Ratio, Liquidity Coverage Ratio and Net Stable Funding Ratio are used instead.
- Insurance Companies – The Debt Ratio is not known (N/K) as I do not have bulk access to insurance company borrowings figures. However, the Debt Ratio does apply to insurance companies and can be calculated manually by dividing total borrowings from the balance sheet by Current Earnings Power (CEP).
- CEP: Current Earnings Power (£m). Calculated as 5-year average adjusted profit after tax. Used to calculate the Debt Ratio and Pension Ratio.
- FCF/Div: 10 year free cash flow to dividend ratio. Used to measure dividend safety. A ratio of more than 1 is preferred, but this is not used explicitly when selecting companies.
Maximum and minimum allowable values
While the stock selection and ranking system is based primarily on the relative strength of the various growth, quality or value factors between companies and the FTSE 100, there are also hard limits beyond which a company will not be allowed into the model portfolio. Stocks with values beyond these limits have them highlighted in dark red and currently the limits are:
- PE10: Maximum value of 30
- Growth Rate: Minimum value of 2%
- Growth Quality: Minimum value of 50%
- Net Profitability: Minimum value of 7%
- Debt Ratio: Maximum value of 4 for companies in cyclical sectors and 5 for companies in defensive sectors
Defensive and cyclical sectors
This is a list of the official FTSE Sectors used in the stock screen, grouped into either defensive or cyclical sectors as defined in the Capita Dividend Monitor:
- Aerospace & Defense
- Fixed Line Telecommunications
- Food & Drug Retailers
- Food Producers
- Gas, Water & Multiutilities
- Health Care Equipment & Services
- Mobile Telecommunications
- Nonlife Insurance
- Personal Goods
- Pharmaceuticals & Biotechnology
- Automobiles & Parts
- Construction & Materials
- Electronic & Electrical Equipment
- Financial Services
- Forestry & Paper
- General Industrials
- General Retailers
- Household Goods & Home Construction
- Industrial Engineering
- Industrial Metals & Mining
- Industrial Transportation
- Leisure Goods
- Life Insurance
- Oil & Gas Producers
- Oil Equipment, Services & Distribution
- Real Estate Investment & Services
- Software & Computer Services
- Support Services
- Technology Hardware & Equipment
- Travel & Leisure
Take the next step
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