At the moment, there seems to be a near-constant stream of views being expressed on whether the market is over or under valued. The sheer audibility of the debate is enough to get one nervous. However, from a stock screening point of view, a very real sign that valuations are looking pushed is that I've found it increasingly hard to get a decent number of positive results from the screens I run that require stocks to meet a fixed valuation measure. In the case this week's 'low-risk, high-yield' screen, the fixed measure of value in question is that stocks have a yield of 3.5 per cent or more. For many of my screens, I've simply switched my valuation criteria to insist that stocks are among the cheapest fifth or quarter or half of the market. However, in the case of this screen, I think it is worth sticking to my guns.
For one thing, a yield of 3.5 per cent can hardly be described as very high - slightly above the median average perhaps, but not much more than that. The second reason for sticking with the criteria is that the screen has done very well since I've been running it on the current basis. Indeed, the cumulative total return from the stocks picked by the screen now stands at 106 per cent compared with 28.5 per cent from the FTSE All-Share (see graph) - although, it should be noted that my cumulative performance figures, which assume switching from one portfolio to the next at the time of each screen, do not account for bid-offer spreads or dealing costs.
Low-risk, high-yield shares versus FTSE All-Share index
Source: Thomson Datastream
Last year’s overall performance from the screen has been particularly impressive and only one of the seven stocks selected underperformed the market (see table). What's more, massive gains from JD Sports Fashion and S&U have helped power a stunning 42.4 per cent total return over the last 12 months compared with 9.6 per cent from the market.
| Name | TIDM | Total return (16/04/13 - 9/04/14) |
|---|---|---|
| AstraZeneca | AZN | 19.4% |
| Provident Financial | PFG | 23.3% |
| XP Power | XPP | 26.8% |
| S&U | SUS | 72.2% |
| British American Tobacco | BATS | -1.5% |
| Cobham | COB | 26.2% |
| JD Sports Fashion | JD. | 130% |
| Average | 42.4% | |
| FTSE All-Share total return | 9.6% |
Source: Thomson Datastream
Unfortunately sticking with the 3.5 per cent yield limit comes at a price, which is that only four stocks make it through this year’s screen, which also comprises of several additional tests. This is a poor result in numbers terms, so in order to assemble a better fistful of results for readers, I’ve also included a table of the eight stocks that yield over 3.5 per cent and passed all but one of the supplementary tests. The additional tests include a low-beta test to try and identify “defensive” stocks that will be less sensitive to wider market movements. The other tests are chiefly there to assess the quality of the underlying businesses and their dividend paying potential. Here’s the full list of supplementary criteria:
■ A one-year beta of 0.75 or less; ■ 10 years of unbroken dividend payments; ■ 10 years of positive underlying earnings; ■ Underlying EPS higher than five years ago; ■ Underlying dividend higher than five years ago; ■ A return on equity of 12.5 per cent or more; ■ A current ratio of one or more; ■ Market capitalisation of more than £100m; ■ Dividend payments covered 1.5 times or more by earnings. |
The four stocks that meet all the criteria receive a write up below while the other eight can be found in the table that follows.
Low-risk, high-yield shares
