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What are we looking for?

The S&P 500 continues to trend lower, below its 20-day and 50-day moving averages, giving us a bearish bias regarding the broad U.S. market. As the market remains under pressure, we decided to search for defensive value plays – stocks that are well below historical value – using the disciplined stock selection criteria of legendary investor Benjamin Graham.

The screen

We use Strategy Builder stock screener to search for companies in the U.S. market that are indicating the best value using traditional value investing criteria. We began by setting a minimum market capitalization threshold of US$10-billion. We wish to focus on large cap names in the market owing to the greater stability and safety that they offer.

Then we employed four key value investing criteria to identify stocks that would be of interest to bargain-hunting value investors. The screen filtered for stocks indicating a price-to-earnings ratio of 10 or less, and a price-to-book ratio of two or less, to help us find companies that may be considered undervalued in relation to the broad market. (These thresholds are at least 20 per cent lower than the S&P 500′s P/E and price-to-book figures, which was suggested by Mr. Graham in his value investing strategy.)

Next, we will apply two dividend-related criteria to our screen.

  • We will select only companies with dividend yields of more than 2 per cent, which tops the 1.7 per cent yield currently indicated for the S&P 500 index.
  • We like companies that have a track record of raising their dividend payments over time. We screened for stocks indicating a five-year average dividend growth rate of at least 10 per cent.

Finally, we screened for companies that are indicating a five-year earnings a share growth rate of at least 10 per cent in order to provide a historical view of how the company has grown its earnings.

For informational purposes, we have included year-to-date and one-year returns.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities.

What we found

Ten dividend-paying U.S. large caps

RANKCOMPANYTICKERMKT. CAP. (US$ BIL.) P/E (TTM)P/B (TTM)DIV. YLD. (%)5Y DIV. GRTH. RATE (%)5Y EPS GRTH. RATE (%)YTD PRICE PERF. (%)1Y PRICE PERF. (%)RECENT PRICE (US$)
1Reliance Steel & AluminumRS-N10.66.531.622.110.5396.013.2168.69
2Regions Financial CorpRF-N18.07.981.173.519.723-15.1-4.718.59
3Hartford Financial Svcs.HIG-N21.48.961.372.410.155-6.64.864.54
4Prudential Financial Inc.PRU-N36.17.750.825.010.415-12.4-6.094.66
5Tyson Foods Inc.TSN-N31.27.771.642.117.613-1.717.085.80
6Citizens Financial GroupCFG-N17.97.650.894.325.421-26.5-21.235.27
7Fidelity National FinancialFNF-N10.34.751.284.810.529-28.4-15.336.68
8KeyCorpKEY-N16.37.111.224.517.627-25.8-15.316.98
9Lennar Corp.LEN-N20.24.780.952.249.530-37.7-29.968.86
10Fifth Third BancorpFITB-Q23.59.831.303.516.814-23.4-10.532.87

Source: Trading Central

Topping our list is Reliance Steel & Aluminum Co., an operator of metals service centres based in Los Angeles. The company has the best year-to-date price performance on our list at 6 per cent, not bad considering the S&P 500 is down approximately 21 per cent in the same period. Looking at value characteristics, Reliance has a P/E of just 6.53 and a P/B of 1.62, which are well below the broad market average. It has the second-highest five-year EPS growth rate on our list, at 39 per cent.

Prudential Financial Inc., based in Newark, N.J., has the largest market cap on our list at US$36.1-billion. Prudential has the lowest price-to-book on our list at 0.82 and the highest dividend yield at 5 per cent.

The company with the lowest P/E on our list, at 4.75, is Fidelity National Financial Inc., which focuses on the real estate and mortgage industry. The company has the second-highest dividend yield on our list at 4.8 per cent.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

Gary Christie is head of North American research at Trading Central in Ottawa.

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