EssDeeAitch wrote:I have looked at the resources and suggestions provided by members (many thanks) and have settled (more or less) on the following screening data for HYP stock
Selection Criteria
Market Cap >500m | PE <20 | Divi Yield >3.5% | EPS Growth >5% | Divi Cover > 1 | Increasing Divs Yes | Fair Value >1
Sorry, but I don't have any real idea what you mean by "Fair Value", beyond it looking likely to be some sort of share valuation divided by the share price. The other criteria are reasonably clear, though it would be interesting to know whether you're using historical or forecast versions of P/E, dividend yield and dividend cover, how many years you're looking for dividend increases over, and whether you're looking for strict increases (i.e. each dividend greater than the previous year's) or non-strict increases (i.e. each dividend greater than
or equal to the previous year's).
One other point that I think is relevant to your two choices below is that while decent EPS growth is good, that
doesn't mean that really high EPS growth is outstanding. It can be, but only if it indicates that the company as a whole is growing very rapidly, and that's very rare in HYP companies, because companies that are growing very rapidly generally need all or most of their cash to keep that growth going, and that leaves little or none to pay dividends from. Furthermore, the market usually (and practically always for companies of any significant size) spots rapidly-growing companies and drives their price up, and so their combination of low/zero dividends and high prices mean that their yields are not high.
Instead, what a very high EPS growth rate usually means in a HYP candidate is that the company had quite badly depressed earnings the previous year, but is recovering / has recovered from whatever problem caused them. That's somewhat mixed news (good that the company is capable of recovering from such things, not so good that it can suffer from them in the first place) rather than outstanding...
The net result is that while I think that your "EPS Growth >5%" criterion is a good one, it needs a health warning about passes by big margins probably not being especially good...
EssDeeAitch wrote:Having filtered through the data and looking at other resources I have arrived at these two candidates and would appreciate any feedback.
Galliford Try - Buy
Market Cap 1.18b | PE 19.2 | Divi Yield >9.3% | EPS Growth >158% | Divi Cover > 2 | Increasing Divs Yes | Fair Value 1.11
SSE - Buy
Market Cap 11.46b | PE 12.9 | Divi Yield >8.1% | EPS Growth >33% | Divi Cover > 1.2 | Increasing Divs Yes | Fair Value 1.14
Do these selections make sense? Am I on the right track?
Well, really I would need some general context to give a clear opinion. In particular, are you starting from scratch, or do you already have some shares in your HYP? If you already have some shares in it, which are they? And are you anticipating further additions to your HYP, and if so, roughly how often?
But in general, I would have significant doubts about adding either of those two to a HYP right now. For SSE, there's a very practical reason for that: it's in the process of demerging part of itself - about 15-20% of the company judging by what they're doing with the dividend. The issue with that is that if you buy it before it completes the demerger, you're likely to end up with two holdings, one of which is a lot smaller than you'd planned on and whose dividend policy isn't known (it's only expected to be published shortly before the demerger completes, which is expected in the first quarter of next year). So especially if the amount I were putting into the holding was fairly small (say £1-2k), I would avoid the possible complication of being left with a small holding in a company I might well decide I didn't want and that would be relatively expensive to sell...
SSE also has the political issue hanging over it of being a utility and so very much in the focus of Labour's nationalisation ideas - I won't try to discuss how much to make of that, as I've not really decided that question even for myself! But on the practical issue alone, I would at least wait until the demerger is close to completing before deciding whether to buy it as a new holding.
Galliford Try has generally struck me as a reasonable 'middling' HYP share - the sort of share one might pick for a HYP's ~10th selection or later, but very likely to be outclassed for earlier selections. As examples of that, for the two HYPs I linked to in my last post, it was my ninth choice for
UHYP15 in 2015, and didn't get into the 15 choices I made in 2011 for the other. I'll add that it didn't get into the 16 choices I made for
UHYP13 in 2013 and was number 16 of the 16 choices I made for
UHYP14 in 2014.
Obviously, numbers have changed and company histories have lengthened since any of those HYPs were selected, so that doesn't say anything definite about Galliford Try as a HYP candidate now. But my general impression of the company is that while it can score well on yield and diversification (it has quite a nice mix of housebuilding, non-house construction and infrastructure operations in my view), its fairly small size, sector and typical debt levels mean that it tends to score less well on dividend safety, the third of the "three legs of the HYP stool" I suggested aiming for. That doesn't rule it out from HYPs, but one can usually find at least a few shares that score well on all three.
So if you're starting from scratch and these are your first two selections, I'm very doubtful that Galliford Try is one to go for. If you've already got a few holdings in your HYP, I might feel differently...
Edit: I see that others have said many of the same things I have while I was writing this - including breaking off for lunch in the middle of it. I'll let it stand, though - editing it down to the new points looks to be more work than it's worth!
Gengulphus