DST Systems: A Cheap Stock With a Dividend Kicker
Wed, 25/08/2010 - 11:18 by David Meier
I believe DST Systems (NYSE: DST) has the right mix of value and income to soundly beat the market over the long haul.
After all, Vanguard Windsor Fund manager John Neff used that same value-plus-income strategy to beat Wall Street by three points per year for 30 years. That's a lifetime of great returns!
Whether you're new to dividend stocks or a grizzled veteran, Neff's secret formula remains relevant today. Here's how I used it to find DST Systems.
A one-two punch of powerful investing
Neff looked for opportunities using his total return ratio, given below:
(Analysts' expected earnings growth rate + dividend yield) / price-to-earnings ratio
According to Neff, a company whose total return ratio was 50% greater than that of the overall market stood a good chance of beating that same market, by offering a better value, a higher yield -- or both!
Today, the market has a total return ratio of roughly 0.95. (I used a Shiller P/E of 20.1, a yield of 2%, and two-year estimated earnings growth of 17.2%.) Thus, stocks with total return ratios greater than 1.43 could have market-beating potential.
Using Neff's criteria, the table below clearly shows that DST Systems offers more opportunity than its competition:
2-Year Growth Est.
Total Return Ratio
CVS Caremark (NYSE: CVS)
Fiserv (Nasdaq: FISV)
Source: Capital IQ, a division of Standard & Poor's, and author's calculations.
The Foolish bottom line
Neff's total return ratio combines value and income, letting you profit from multiple expansion while collecting big, bad dividend payments along the way. And as Neff showed, value and income can collectively deliver market-beating returns. Neff's total return ratio may just be a starting point. But with a total return ratio of 1.57, DST Systems certainly looks like a cheap stock with a dividend kicker.
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