Low PEG Ratios and High Dividend Yields
) & Fortress Investment (
Fundamental Analysis 101
A sure-fire method to find stocks to invest in which will
outperform the stock market during the next year or two, is to
ferret out stocks with low PEG ratios and generous dividend
Calculate PEG Ratios and Become an Intelligent
I prefer to determine PEG ratios using the following method
because my method brings the dividend into the equation. First,
let's look at the components. The inputs are simple: the current
stock price of a company (
), the latest four quarters of earnings per share (
), an estimate of how fast earnings per share will grow during
the next five years (
) and lastly, the latest annual dividend yield.
Next, you can calculate the price to earnings ratio (P/E) by
dividing the current stock price (
) by the latest four quarters of earnings per share. Then
multiply the latest quarterly dividend by four to convert the
quarterly amount to the annual dividend. Then divide the annual
dividend by the current price (
) to derive the annual dividend yield (D). Finally, divide the
P/E ratio by the combined Growth and Dividend Yield to determine
the PEG ratio.
If you are using a computer spreadsheet, use the following
formula to compute the PEG ratio:
PEG Ratio = SUM(P/E)/SUM(G+D)
Many investors do not include the dividend yield in the PEG
ratio, but I believe my calculation is an excellent method to
compare companies paying higher than average dividends. I like to
think PEG ratios which include yields are used by the most
How to find High-Quality Companies
In addition to low PEG ratios (below 1.00), I look for good
quality companies with a history of steady earnings and dividends
growth. Quality companies may not be extreme bargains, but
high-quality companies will likely produce reliable dividend
income and price appreciation.
A very simple measure can be used to determine which companies
are high-quality and have produced steady earnings and dividend
performance during the past 5 to 10 years. Standard & Poor's
evaluates most stocks and assigns a ranking called the S&P
Companies with A+, A, and A- S&P rankings indicate
high-quality. I generally like to find companies with these
rankings, although I will often include a company with a B+
ranking or occasionally a B ranking, if I believe the company has
exceptional prospects. S&P rankings are usually provided on
your broker's website. Just go to the stock research tab and
enter S&P in the search box.
In my February 11, 2013 Cabot Wealth Advisory, I recommended
buying Microsoft (MSFT) and Prudential Financial (PRU) which had
low PEG ratios. My recommendations have performed very well
during the past four months despite the recent drop in the stock
market. MSFT has climbed 19% and PRU is up 25% compared to a
lesser gain of 5% for the Standard & Poor's 500 Index.
High-quality stocks with low PEG ratios have consistently
outperformed the stock market indexes in both advancing and
declining markets. Investing in quality stocks at bargain prices
makes sense in any stock market environment.
Two good examples of companies with low PEG ratios are
Deutsche Telekom AG (
Fortress Investment Group (
. The companies' PEG ratios are less than 1.00, and DTEGY and FIG
pay dividends yielding more than 3.5% which is an exceptional
Deutsche Telekom AG (DTEGY: 11.35)
, based in Bonn, Germany, is Europe's largest communications
company and one of the largest communications carriers worldwide.
Deutsche Telekom offers a complete range of voice telephony
products and services to its customers.
Through T-Mobile, Deutsche Telekom's mobile telephony
subsidiary, and through other subsidiaries and investments, the
company serves mobile telephony customers worldwide. Its major
markets include Germany (57% of sales), the U.S. (24%) and other
Sales increased just 1% and EPS dipped 12% during the past 12
months ended 3/31/13. Weak demand at T-Mobile USA and soft
revenues from landlines in Germany hurt results. However, sales
will likely increase 3% and EPS will jump 25% during the next 12
months ending 3/31/14. T-Mobile recently gained approval to sell
iPhones for the first time. T-Mobile is also in the process of
purchasing MetroPCS, which will greatly improve Deutsche
Telekom's position in the U.S.
With a P/E of 15.1, expected EPS growth of 11.0%, and with a
low PEG ratio of 0.80, DTEGY shares are clearly undervalued. The
dividend yield is 7.8%, which is very attractive and well
supported by more than $4.00 per share of cash flow. Shares are
medium risk, but have low volatility.
Fortress Investment Group (FIG: 6.67)
is a leading global alternative asset manager with $34 billion in
assets under management as of March 31, 2008. Fortress is
headquartered in New York City and has affiliates with offices in
major cities around the world.
Fortress raises, invests and manages private equity funds and
hedge funds. Fortress intends to grow its existing businesses by
continuing to create innovative products to meet the increasing
demand by sophisticated investors for superior risk-adjusted
Revenues jumped 25% and EPS soared 75% during the 12 months
ended 3/31/13. Assets under management received a big boost from
stock market returns and from substantial additions to its
private equity funds. Fund investments appreciated 30% from a
year ago, which helped fuel 30% growth in capital inflows.
Revenues will likely rise another 5% and EPS will advance 24%
during the 12 months ending 3/31/14. Fortress's stellar
investment returns will attract additional capital during the
next several quarters.
At 11.0 times current EPS and with a low PEG ratio of 0.65,
FIG shares are undervalued. The dividend yield is 3.4%, which is
attractive. Fortress Investment is high risk, though, because of
wide swings in its share price.
Until next time, be kind and friendly to everyone you
Editor of Cabot Benjamin Graham Value Letter