In this article, I will be screening for companies that meet the following criteria of dividend growth, momentum, and owned by hedge funds. For my search for companies that meet those criteria, I will be using the corresponding ETF to look at the holdings of each and see which companies are included in all three.
Dividend Growth
For my dividend growth ETF selection, I chose to use a new dividend Growth ETF, the WisdomTree U.S. Dividend Growth ETF (DGRW). The reason I chose to use this ETF over older dividend ETFs was that DGRW, in addition to dividend growth, uses a ranking system in which
"The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three year historical averages for return on equity and return on assets." [DGRW Fund Page]
Therefore, the fund excludes those companies that have poor earnings growth estimates and lower quality factors. DGRW has 300 holdings so I copy and pasted those into a spreadsheet for my starting list.
Momentum
For my momentum ETF selection, I chose to use the PowerShares DWA Momentum Portfolio ETF (PDP). The reason I chose to use this ETF was that in rising markets like we have now, momentum stocks tend to outperform the S&P 500 (SPY). PDP has 101 holdings so I copy and pasted those into my spreadsheet.
Hedge Funds
For my Hedge Fund ETF selection, I chose to use the Global X Guru Index ETF (GURU). The reason I chose to use this ETF was that GURU
"uses a proprietary methodology to compile the highest conviction ideas from a select pool of hedge funds where the 13F information is most valuable. For example, hedge funds with high turnover are eliminated from the pool." [GURU Fund Page]
Therefore, the fund excludes those companies that are "short-term" investments and finds those hedge funds which tend to hold positions for longer. GURU has 60 holdings, so I copy and pasted those into my spreadsheet.
Results
After copy and pasting each ETF's fund holdings into my spreadsheet, I put all the holdings in one column, sorted the list, and found that three companies were included each ETF, thus meeting the goal I set out to achieve. Below I will perform a DCF calculation to estimate the fair value of each company and the dividend growth potential of each company going forward.
Company #1: Apple (AAPL)
Value
To value AAPL I will be using a DCF calculator, with data for earnings and growth coming from Zacks.com, benchmark data from longrundata.com, and CPI data from the BLS. The DCF table below shows the fair value of AAPL is $835.27, which is 59.03% above current the current price.
- EPS [ttm]: $40.32
- Long-term Growth Rate: 11.84%
- Earnings grow for next: 5 years
- Level off: to 1% after
- Benchmark return: 10 yr annualized SPY return of 7.05%+1.60% inflation= 8.65% benchmark
Dividend Growth
Apple has only in the last couple of years started paying a dividend, and it has already grown its dividend and should continue to do so into the future. Currently Apple pays a $3.05/share quarterly dividend, which is a total of $12.20. When divided by its EPS of 40.32, this gives a dividend payout ratio of 30.32%. Therefore, Apple still has plenty of room to continue raising its dividend.
Company #2: Comcast (CMCSA)
Value
To value CMCSA I will be using a DCF calculator, with data for earnings and growth coming from Zacks.com, benchmark data from longrundata.com, and CPI data from the BLS. The DCF table below shows the fair value of CMCSA is $52.88, which is 4.65% above current the current price.
- EPS [ttm]: $2.47
- Long-term Growth Rate: 12.66%
- Earnings grow for next: 5 years
- Level off: to 1% after
- Benchmark return: 10 yr annualized SPY return of 7.05%+1.60% inflation= 8.65% benchmark
Dividend Growth
Comcast has been steadily paying a growing dividend over the last 6 years. Comcast has increased its quarterly dividend from $0.063/share in 2008 to a current level of $0.195, which is an average increase of 32.64% growth in its dividend each year. Currently Comcast pays a $0.195/share quarterly dividend, which is a total of $0.78. When divided by its EPS of 2.47, this gives a dividend payout ratio of 31.58%. Therefore, Comcast, based on its payout, still has plenty of room to continue raising its dividend. However, with its recent attempt to purchase Time Warner Cable (TWC), this could potentially slow the pace of dividend growth.
Company #3: Lockheed Martin (LMT)
Value
To value LMT I will be using a DCF calculator, with data for earnings and growth coming from Zacks.com, benchmark data from longrundata.com, and CPI data from the BLS. The DCF table below shows the fair value of LMT is $183.83, which is 11.95% above current the current price.
- EPS [ttm]: $10.30
- Long-term Growth Rate: 8.17%
- Earnings grow for next: 5 years
- Level off: to 1% after
- Benchmark return: 10 yr annualized SPY return of 7.05%+1.60% inflation= 8.65% benchmark
Dividend Growth
Lockheed Martin has been steadily paying a growing dividend over the last 6 years. Lockheed Martin has increased its quarterly dividend from $0.22/share in 2003 to a current level of $1.33, which is an average increase of 22.13% growth in its dividend each year. Currently Lockheed Martin pays a $1.33/share quarterly dividend, which is a total of $5.32. When divided by its EPS of 10.30, this gives a dividend payout ratio of 51.65%. Therefore, Lockheed Martin, based on its payout, could potentially see a slowdown in dividend growth because getting above the 50% leaves not a whole lot of room for dividend growth.
Closing Thoughts
In closing, I believe that out of the three companies that met my criteria, Apple is the one that will have the best performance. There are two reasons I believe Apple will have the best performance.
The first is that it is the most undervalued out of the three companies that met my criteria. Yes, Comcast is also undervalued but Comcast could buy Time Warner Cable; therefore that could change its valuation. Lockheed Martin is also undervalued, but 11.95% undervalued is not even close to the 59.03% that Apple is undervalued.
In addition, when looking at dividend growth potential, again Comcast has a potential Time Warner Cable acquisition, so that could possibly hinder dividend growth, and Lockheed Martin has a dividend payout ratio of just over 50%, which leaves less room to the upside to raise its dividend. Apple, on the other hand, has the lowest dividend payout ratio out of the three companies. Therefore I believe that, in addition to shares of Apple being undervalued, it also has the most upside to grow its dividend as well.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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