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What are we looking for?

Could this year’s best-performing equities be among last year’s “dogs"? It’s a play on an investment theory: A negative overreaction in the prior year could lead to a potential bounce in the current one. As some would say, a new year brings new beginnings, and indeed the stock market rally we’ve seen in early 2019 would appear to back this up.

As a follow-up to our previous article on TSX-listed names, my associate Allan Meyer and I thought we would take a closer look at some of the dogs in the S&P 500 using our investment philosophy focused on safety and value.

The screen

Market cap is a safety factor – larger companies tend to be more liquid while having more stable and diverse business operations. To find our dogs, we looked at companies with one-year total returns of negative 30 per cent or worse. The list is sorted on this metric, starting with the worst. We used total returns over the past 12 months as opposed to calendar year 2018 in order to have current data, but we still believe this exercise supports the general theory.

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Dividend yield is the projected annualized dividend divided by the share price and yet another safety measure. Our list is limited to dividend payers.

Debt-to-equity is our final safety factor; this ratio is the total debt outstanding divided by shareholders’ equity. A lower number is preferred and we capped it at 100. This implies that all names on the list are not overly leveraged – they have enough equity to pay off their debts.

Our investment philosophy also focuses on value – we’re always looking for bargains. Price-to-earnings is the share price divided by the projected earnings per share. It is a valuation metric – the lower the number, the better the value.

Earnings momentum is the change in annualized earnings over the past quarter. A positive number means earnings are growing, which should lead to long-term price appreciation and perhaps dividend bumps. The opposite is true for a negative number.

What we found

American Airlines Group Inc. and disability insurance provider Unum Group score well for safety and value. They are also two of four names on the list without any debt – global insurance company American International Group Inc. and retailer L Brands Inc. being the others.

Video game maker Activision Blizzard Inc. has the highest earnings momentum, while investment manager Invesco Ltd. boasts the best dividend yield. Financial services holding company Lincoln National Corp. and oil and gas producer Cimarex Energy Co. also look interesting on most measures.

Investors should contact an investment professional or conduct further research before buying any of the securities listed here.

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S&P 500 dividend stocks with one-year total returns of minus 30 per cent or worse

CompanyTickerMkt. Cap. (US$ Bil.)Recent Close (US$)1yr Total Return (%)Div. Yield (%)Debt/Equity (%)P/EEarns. Momentum (%)
Coty Inc.COTY-N8.311.08-57.24.585.015.7-11.4
Perrigo Company PLCPRGO-N6.648.60-48.41.654.110.6-5.8
Invesco Ltd.IVZ-N7.518.27-47.16.689.08.4-10.7
Western Digital Corp.WDC-Q14.047.98-46.94.296.98.8-17.6
Nvidia Corp.NVDA-Q94.3154.53-40.10.421.329.2-10.4
Schlumberger NVSLB-N61.044.14-39.54.544.426.3-6.9
L Brands Inc.LB-N7.527.27-39.44.40.010.0-4.8
Fluor Corp.FLR-N5.035.69-38.52.448.411.9-5.9
Westrock Co.WRK-N9.838.38-36.64.755.98.9-1.0
Devon Energy Corp.DVN-N12.827.33-36.31.274.219.213.8
Kraft Heinz Co.KHC-Q57.747.34-36.25.347.812.8-1.4
Activision Blizzard Inc.ATVI-Q34.745.43-35.30.823.519.415.6
State Street Corp.STT-N26.168.66-34.32.761.69.9-2.0
Cimarex Energy Co.XEC-N7.274.87-33.11.057.911.915.1
Unum GroupUNM-N7.735.39-33.02.90.06.43.4
American Airlines GroupAAL-Q16.636.11-33.01.10.05.92.0
FedEx Corp.FDX-N48.0183.92-31.51.485.410.65.2
CBOE Global Markets Inc.CBOE-A10.492.64-30.91.337.518.715.4
American Int'l Group Inc.AIG-N35.640.19-30.83.20.08.6-51.7
Lincoln National Corp.LNC-N12.859.92-30.52.540.76.52.0

Source: Eikon, Wickham Investment Counsel

Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.

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