Buy Rules

Buy Rules

Buy Rules

Know How To Buy A Stock

While choosing a stock, make sure you are in line with guidelines of the stock portfolio management, described in Eudividend Investing System. For that you have to consider the following metrics.

  • Market conditions. Do not invest when the market is in clear downturn.
  • Diversify your portfolio by 5-6 industries with 3-5 companies in each of them.
  • Pay attention to the size of the company. Larger companies are preferable to smaller ones.
Decision Making Process
  • Understand how the company performed in the past
  • Understand its current situation
  • Evaluate how the future of the company could unfold

Then apply your judgement how you see the balance of the past, current and future company conditions.

Is that particular combination right for you?

Is it something you are looking for?

Do you understand how the company makes money?

Are you ready to share good and bad times with that company?

The decision you take depends on your personal attitude to risk, on the level of your experience and confidence in investing.

Eudividend tools facilitate this decision making process. In order to investigate a particular stock, you can enter ticker on Eudividend stock screen and see company’s past performance graphs. Comments next to each graph guide you how to judge the company’s performance in respect of data on a graph.

Past Performance of Company

Let’s look at the fundamental data in more detail. We know that past performance does not guarantee future results. However, we can use it as one of the indicators of the company’s future performance. It allows judging how the company performs relative to its peers.

DIVIDEND YIELD

The company’s dividend yield should not be too low. If it is, the stock as a dividend payer is less useful for an income investor. However the dividend yield should not be too high as well. Too high yields usually are an indication that the price of a stock is very low and probably the company is in trouble. Consider stocks with dividend yields of 8% per annum or higher to be too risky for your portfolio of stocks. Look for a dividend yield that is slightly higher than the industry average.

SHARE PRICE

Share price fluctuations are much higher than those of earnings or dividends. Over longer term a price of share should reflect a dividend growth. So, check how much the price growth follows the dividend growth. Also check for a price up trend in the last 3-4 quarters.

PAYOUT RATIO

Payout ratio (POR), dividend per share divided by earnings per share, shows how sustainable the dividend payments are. Many companies target a certain payout ratio in their dividend policy. Look for stable payout ratios over longer periods of time. Payout ratios within the range of 40% to 60% are preferable. The ones above 80% are too high for the majority of industries. It means that almost all earnings of the company are paid out in dividends and there is less scope for future business development and subsequent dividend increases. A payout ratio below 40% usually means quite low dividend income for an investor.

SALES

Sales growth rate can differ substantially amongst industries. Regardless of the industry, look for consistent smooth growth over years. Smaller companies usually grow faster than larger ones. As in the case of earnings, look for double digit year on year grow of sales for small, medium companies and single digit growth for larger ones. Evaluate how resistant company’s sales are relative to business cycles by checking how the company behaved in the past during economic downturns. Look for companies with sales growth above that of other companies in its industry. Pay special attention to the sales growth in the latest quarters. Look for any anomaly in data and find out the reason for it.

DEBT TO EQUITY RATIO

Debt to equity ratio (D/E) shows how much debt the company is using relative to the shareholders equity. The level of indebtedness differs by the industry. Look for less indebted companies, for companies with debt to equity ratio below that of peers. Look for any significant changes in debt and check the reasons for that change.

CASH FLOW PER SHARE

Dividends are (mostly) paid out of cash. Cash flow per share (C/F) is earnings per share plus depreciation per share. Look for a company that has steady and consistent cash flow numbers. Look for cash flow per share that is higher than dividend, because it means that the company has enough cash to pay dividend. Look through all of these indicators and decide whether the company is one of the best in its industry.

DIVIDEND GROWTH

The history of dividend payments is an important consideration. The longer a company pays dividends the higher are chances it will continue doing so in the future. A history of regular dividend increases shows how much management is committed to consistent dividend policy. It also shows the company’s financial capability to conduct a consistent dividend policy. Once increased, dividend should be supported in the future. So, one can expect that they are increased in a prudent and responsible way. Look for companies with longer periods of dividend increases. Companies with a higher dividend growth and a longer history of growth are preferable within the industry since it shows that the company is well run and future consistent dividend increases are more likely. Dividend cuts in the past should be considered as red flags. Over time share price usually reflects dividend growth. So, check for consistency of price growth with dividend growth.

EARNINGS PER SHARE

The history of earnings per share (EPS) growth and its future projections allow to evaluate how sustainable will be dividend growth since dividends are paid out of earnings. Look for faster growth (double digit percentage growth year on year) in earnings per share for smaller companies and slower growth (single digit percentage) for larger ones. Earnings should grow faster or in line with the company’s sales. Compare earnings growth with that of peers. Look for earnings growth in line or above that of other companies in the industry. Pay close attention to the earnings dynamic in the latest quarters. Are the earnings growing or falling? Look for anomalies in earnings figures and decide whether they will repeat in the future.

PROFIT MARGIN

Profit margin (PM) or net profits divided by sales, shows what part of sales are attributable to earnings. Look for companies with stable profit margin which is above that of other companies in its industry. Look for a stable or uptrend development of profit margin in the latest quarters.

RETURN ON EQUITY

Return on equity (ROE) or net profit of the company divided by shareholder equity, shows what return is achieved on shareholders’ money. Look for a company with a stable return on equity over time and higher than that of other companies in its sector. Also check that it is not down in the latest quarters.

Estimate of Future Performance

This is about collecting information from the company’s financial reports, analysts’ researches, recent articles, etc.

The company can strengthen its business by introducing new products or services, expanding geographically, increasing prices, acquiring another company or in some other way. Evaluate what tools the company would use to succeed in the future.

Do not forget to consider the long term prospects of the industry a company belongs to.

Valuation

If you think it is a good company in terms of past performance and future expectations, then check how reasonable is its current stock price. On Stock Screen page make your estimates of future sales, earnings and dividend growth. Then a stock price estimate is calculated automatically. So you can judge whether the company is expensive or not with regard to its historical Price – to Earnings Ratio.

A stock price estimate is calculated as follows.

We evaluate what could be the stock price in the future and compare it with the current stock price. To make a stock price projection we use a historical Price – to – Earnings ratio (P/E) of the stock.

The price of a stock in 5 years is calculated as average P/E over the last 5 years multiplied by Earnings Per Share (EPS), expected in 5 years in the future.

Before investing, be confident that the company could succeed in the long term. Before you buy a stock, always write down the reasons WHY you decided to buy that particular stock.

The more efforts you put on picking the right stock, the less of a problem will be selling a stock.

Eudividend.com is your source of comprehensive information about the largest European dividend paying companies. Read articles and use our investing tools to learn more about companies, industries and economies of Europe.

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