Stock analysis and investments don’t have to be complex. It is very easy to spend an awful lot of time analyzing a stock which then takes a completely different direction than you thought. Here are five tips that you can use to increase your chances of finding the next winner.
I want to mention that I don’t necessarily follow all of these to the letter myself, although I agree with most of them. As a dividend investor, I also look at other factors that I think are important for a company to be an attractive dividend.
Find good stocks – 5 points to start from
Buy only companies that make a profit
If you ask me, this is an important point but it doesn’t have to be important to everyone.
Don’t all listed companies have to make a profit? No, a company does not have to make a profit every single year. Some companies, especially in their early years or during difficult economic periods, may show red on the bottom line at the end of the year. However, it is important for limited companies to strive for profitability in the long term.
The advantage of profit is of course that it gives the company a better financial basis and that it is easier to manage costs and unexpected expenses. In addition, a strong profit can act as a nice cushion when the economy declines or the unexpected happens. We never know when the next pandemic or similar will come.
Of course there are exceptions. The big tech companies that are now high up in the S&P500 were once big hopeful companies that didn’t make a profit.
Low indebtedness in relation to annual profit
Debt under 2.0 times Ebitda
This is probably one of the points I like the most and which I weave into all my analyzes where the focus is dividends. A debt of 2x Ebitda means that it takes the company two years to pay off their entire debt with the profit they make annually.
If the number is higher, you should really think about why it is.
If we look at the average again, shares with lower debt than 2.0 are up 14% in the last 2 years, while those with higher debt are up 8%.
Of course, the very best thing is not to have a debt at all, but perhaps rather to sit on a cash register.
Revenue growth
+10% annually on average over the last three years
That turnover increases over time is of course an extremely important factor for profits and dividends to also increase. An increased turnover shows that the company succeeds in attracting more customers and selling more products or services. This, in turn, is a positive indicator of the health of the business.
I think 10% is a reasonable number on average. High turnover growth is clearly a sign that a company is doing well.
Development of the margin
That during a 5-year period had a growing operating margin
What a rising operating margin says is that the company is getting better at turning revenue into profit. This means that more sales contribute to the profit, which in turn is a positive indicator of the company’s profitability. If the operating margin rises, it often shows that the company has become more efficient in its operations. This can be through reduced costs or by increasing sales prices but at the same time maintaining volume.
The companies pay dividends
In general, dividends do not in themselves create value. What I mean is that the share price tends to fall by as much as the company shifts out to the shareholders in the form of dividends, all other things being equal. In the short term, it’s a zero-sum game.
We must also remember that dividends are one of the few ways for a company to directly distribute money to the owners for their investment, something that usually increases loyalty and trust in the company. The shareholders can then do whatever they want with the money. Some want to reinvest these in the same company, others use the dividend to add a golden edge to their own existence.
Historically, however, it has always been better to own dividend-paying companies when the stock market falls, while companies that inject profits directly into their own operations do better when the economic wheels are spinning fast.
Regular dividends also provide shareholders with a sense of stability and predictability.
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