15 Dividend Stocks Trading Below Their Calculated Fair Value

Price is what you pay. Value is what you get. -Warren Buffett This is one of my all-time favorite Buffett quotes. In ten small words the entire philosophy of value investing is conveyed. The inherent message is that price and value aren't necessarily the same. This is how value investors make money in the stock market - buying stocks for less than their fair value. When selecting dividend growth stocks, I take a value approach in determining the maximum price I can pay and still obtain my long-term target. The focus is on the investment's value derived from the future dividend stream generated by the stock. Since I am looking at stocks differently than many other investors, I can often find value, as I have defined it, when others can not. Here is how I calculate Fair Value: Fair Value Price I use the Mid-2 Price and the NPV MMA Price when calculating the Fair Value Price of a stock. They are weighted depending on where we are in the cycle. Of the two, I consider NPV MMA Price the more important. We will look at how each is calculated below. NPV MMA Price This approach considers two cash flows - one from a Money Market Account (MMA) earning a rate equal to a 20 year Treasury and a dividend growth stock. The value calculated is the net present value (NPV) of the difference between the annual dividend earnings of this investment and the interest income from the MMA over 20 years. The NPV MMA target is determined based on the number of consecutive years of dividend increases. The formula is: Target = Base - (Years x Increment) + Minimum where Base=3,000, Increment=100, Minimum=500. Thus 0 years of dividend growth yields a $3,500 target and 30 years of growth yields a $500 target. The D4L-PreScreen.xls model can be used to calculate this number. Mid-2 Price The Mid-2 Price is based on more traditional calculations. It considers four fair value calculations, Average High Yield Price, 20-Year DCF Price, Average P/E Price and Graham Number, the highest and lowest fair values are excluded and the remaining two calculations are averaged to calculate the Mid-2 Price. The 20-Year DCF (Discounted Cash Flow) Price is calculated by taking the Net Present Value (NPV) of the next 20 years of dividends and the estimated value of the stock at the end of 20 years. See 20-Year-DCF.xls for an example of how this is calculated. Average High Yield Price is calculated by dividing current dividend per share by the average high dividend yield price for each of the last 5-years (dividend per share divided by the year's low share price). Average P/E Price is calculated by multiplying the EPS (trailing twelve months) times the minimum of: 1.) 5-year average of high and low P/Es or 2.) Last years high P/E. The Graham Number Price is calculated by taking the square root of 22.5 times the tangible book value per share times EPS (lower of trailing twelve months or average last 3 years).123... Read more