The Sure Analysis Research Database ranks securities based on expected total return. Securities are analyzed in 2 and 3 page reports over a variety of metrics. This document explains how these metrics are calculated, and why they matter.
Table of Contents
- Dividend Risk Score
- Retirement Suitability Score
- Key Metrics
- Growth On A Per-Share Basis Metrics
- Valuation Analysis Metrics
- Safety, Quality, Competitive Advantage, & Recession Resiliency Metrics
- Income Statement Metrics
- Balance Sheet Metrics
- Profitability & Per Share Metrics
Dividend Risk Score
The dividend risk score measures how risky a stock’s dividend is. That is, how likely it is to be cut or eliminated.
Formula Part 1: Dividend Risk Score (Raw) = Payout Ratio x 100 – # Years of Steady or Rising Dividends + 50 if deemed risky during a recession
Formula Part 2: Securities are ranked based on their Dividend Risk score and separated into quintiles. The top 20% receive an “A” ranking, the next 20% a “B” ranking, the next 20% a “C” ranking, the next 20% a “D” ranking, and the final 20% a “F” ranking.
Explanation: The higher the raw Dividend Risk Score, the riskier the security’s dividend. Intuitively, a higher payout ratio makes a stocks’ dividend riskier, all things being equal. Similarly, having a long dividend history shows a company is able to maintain its dividend over difficult economic periods and that management prioritizes the dividend. Longer dividend histories mean less dividend risk; that is why dividend history is subtracted from the payout ratio x 100. Finally, if a stock is deemed risky during a recession, an additional 50 points are added to the dividend risk score.
Payout Ratio Explanation: The payout ratio used in the formula above uses current dividends or distributions in the numerator and expected current year adjusted EPS (or similar) in the denominator. “Or similar” means that for REITs we will use funds from operations per share or adjusted funds from operations per share in most cases. For MLPs we will use the distributable cash flow payout ratio. For stocks we typically use EPS or adjusted EPS. We will always use the earnings or cash flow metric we believe best reflects the real economic reality of the payout ratio. As of now, MLP data needs to be adjusted. We will make these changes over the coming weeks.
Recession Risk Explanation: Recession risk is a binary metric; a stock is either recession resistant, or it isn’t. The goal of this portion of the Dividend Risk Score is to give our best assessment of if the security will not cut its dividend during a downturn. This portion of the Dividend Risk score is qualitative, and several factors go into making the final decision. Factors considered include: current payout ratio, dividend history, business model, performance during last recession, and worst period of performance over the last decade.
Final Note: The Dividend Risk Score in the Excel sheet and table reflect the process described above. Reports prior to November 2018 may have the Dividend Risk Score calculated in a different way, which we have since simplified and improved.
Retirement Suitability Score
The Retirement Suitability Score measures how well a security matches the needs of a “typical” investor in the retirement / distribution phase of investing. Specifically, the retirement suitability score looks at a mix of dividend safety and dividend yield (or distribution safety and yield depending on the security type).
Formula Part 1: Retirement Suitability Score (Raw) = (1 – Dividend Risk Score Percentile) + Dividend Yield Percentile
Formula Part 2: Securities are ranked based on their retirement suitability risk score and separated into letter grades. The top 10% receive an “A” ranking, the next 25% a “B” ranking, the next 30% a “C” ranking, the next 25% a “D” ranking, and the final 10% a “F” ranking.
Explanation: The higher the dividend risk score percentile, the riskier the dividend. The higher the dividend yield percentile, the higher the security’s yield. The retirement suitability score takes these two factors into account to find securities that have a mix of safety and current income.
Final Note: The Retirement Suitability Score in the Excel sheet and table reflect the process described above. Reports prior to November 2018 may have the Retirement Suitability Score calculated in a different way, which we have since simplified and improved.
These are the metrics found in the “Key Metrics” section of each Sure Analysis Research Database report. Metrics are listed in the order that they appear in the “Key Metrics” section of each Sure Analysis Research Database report.
Current Price: The current price of the security as of the date the report was written. Prices in the online table and Excel sheet are updated on Monday, Wednesday, and Friday.
Fair Value Price: Out estimate of the fair value price of the security today, if it traded it what we believe to be the fair valuation multiple.
% Fair Value: The discount to (or premium above) fair value. The lower this percentage, the better. It is calculated as current price divided by fair value price.
Dividend Yield: The dividend or distribution yield of the security at the time the report was written. It is calculated as dividend or distribution per share dividend by the current price. Dividend yields in the online table and Excel sheet are updated on Monday, Wednesday, and Friday.
Dividend Risk Score: See the Dividend Risk Score section of this document for a detailed explanation.
5 Year CAGR Estimate: CAGR stands for “Compound Annual Growth Rate”; it is the 5 year expected total annualized return for the security in question. The 5 Year CAGR Estimate is calculated as the sum of the 5 Year Valuation Multiple Estimate, 5 Year Growth Estimate, and Dividend Yield.
5 Year Growth Estimate: This is an estimate of annualized returns over the next 5 years coming from growth on a per share basis. “On a per share basis” means accounting for changes in share count. This is important as it gives an estimate of growth returns to shareholders (which is what shareholders should care about) as opposed to growth of the overall business. We generally calculate our 5 year growth estimates with adjusted EPS for stocks, adjusted funds from operations (FFO) for REITs, and EBITDA/share for MLPs. In some cases we will use different metrics if we believe they better reflect underlying business growth on a per share basis. In addition, we tend to start our growth estimates based on historical growth rates for the company in question and make changes accordingly. Estimating growth rates is an art, not a science.
5 Year Valuation Multiple Estimate: This is an estimate of returns over the next 5 years coming from valuation multiple changes. These returns are calculated under the assumption that the security in question will return to fair value over the next 5 years. The formula used to calculate the 5 Year Valuation Multiple Estimate is (using the P/E ratio as our preferred valuation multiple):
(Fair Value PE Ratio / Current PE Ratio) ^ (1/5) – 1 = Annualized Valuation Multiple Change Returns
In most cases, we use the P/E ratio for valuation for stocks and P/FFO for REITs. We will occasionally use a different valuation metric if we believe it is a better measure of value for the company in question. Estimating valuation multiples and fair values is an art, not a science.
5 Year Price Target: The 5 year price target is calculated as our fair valuation multiple estimate x 5 year forward EPS (or a similar metric). It is our estimate of where the price of the security will be 5 years from now if it returns to fair value and grows at the same rate as our 5 Year Growth Estimate.
Retirement Suitability Score: See the Retirement Suitability Score section of this document for a detailed explanation.
Volatility Percentile: The percentile rank of a security in The Sure Analysis Research Database using 3 year stock price standard deviation. The lower the percentile, the better (lower volatility).
Momentum Percentile: The percentile rank of a security in The Sure Analysis Research Database using trailing 1 year total returns (including dividends). The higher the percentile, the better (higher momentum).
Growth Percentile: The percentile rank of a security in The Sure Analysis Research Database using our 5 year expected growth rates on a per share basis. The higher the percentile, the better (higher expected growth rate).
Valuation Percentile: The percentile rank of a security in The Sure Analysis Research Database using our 5 year expected valuation multiple change. The higher the percentile, the better (higher expected returns from valuation multiple increases).
Total Return Percentile: The percentile rank of a security in The Sure Analysis Research Database using our 5 year expected total returns. The higher the percentile, the better (higher expected total returns).
Growth On A Per-Share Basis Metrics
These are the metrics found in the “Growth On A Per-Share Basis” section of each Sure Analysis Research Database report. Metrics are listed in the order that they appear in the “Growth On A Per-Share Basis” section of each Sure Analysis Research Database report.
EPS: EPS stands for “Earnings Per Share”. It is a measure of the profits generated per share owned. We typically use adjusted EPS in our calculations, but sometimes use GAAP EPS depending on data availability and what we believe better reflects ‘real’ earnings power.
DPS: DPS stands for “Dividends Per Share”. It measures the amount of dividends (or distributions) paid out over a 1 year period per share. Consistently rising dividends over time is a sign that a business is reliably growing over various economic conditions.
Shares: These are the number of shares outstanding for the company. In general, a declining share count is a positive as it gives each shareholder greater percentage ownership of the business in question as share count decreases. If you own 1 share out of 100, you own 1% of a business. If the company buys back 50 shares, you now own 1/50 = 2% of the business… Without having to buy any additional shares yourself.
Valuation Analysis Metrics
These are the metrics found in the “Valuation Analysis” section of each Sure Analysis Research Database report. Metrics are listed in the order that they appear in the “Valuation Analysis” section of each Sure Analysis Research Database report.
Avg. P/E: Avg. P/E stands for “average price-to-earnings ratio”. It is the average price-to-earnings ratio for a security over a given year. The P/E in the “now” column of the table in our reports is the price to earnings ratio using the current price and expected current year EPS.
Avg. Yld.: Avg. Yld. stands for “average yield”, or more accurately “average dividend or distribution yield”. It is the average dividend or distribution yield for a security over a given year. The yield in the “now” column is the current yield.
Safety, Quality, Competitive Advantage, & Recession Resiliency Metrics
These are the metrics found in the “Safety, Quality, Competitive Advantage, & Recession Resiliency” section of each Sure Analysis Research Database report. Metrics are listed in the order they appear in the “Safety, Quality, Competitive Advantage, & Recession Resiliency” of each Sure Analysis Research Database report.
GP/A: GP/A stands for “Gross Profit divided by Assets”. It measures the profitability of a company based on its assets. In other words, how well the company is using its assets to make money. The higher the GP/A ratio, the better. Companies that score well using this metric have historically outperformed.
Debt/A: Debt/A stands for “Debt divided by Assets”. It measures the capital structure of a business. Businesses with higher debt to asset ratios employ more leverage.
Interest Coverage: The interest coverage ratio is calculated as trailing twelve month EBIT (Earnings Before Interest & Taxes) divided by trailing twelve month interest expense. It shows how many times the pretax and per-interest expense profit the company makes covers its interest expense.
Maximum Drawdown: Maximum drawdown measures the largest decline a security has experienced, factoring in dividends. It is calculated as (peak value before largest drop – lowest value before new high established) / (peak value before largest drop).
Payout Ratio: The payout ratio is calculated using data for the “Growth On A Per-Share Basis” section. It is calculated as dividends or distributions per share divided by EPS (or a similar metric). A payout ratio over 100% is unsustainable. The higher the payout ratio, the riskier the dividend, all other things being equal.
Standard Deviation: Standard deviation is measured using price data over the last year. Lower standard deviation stocks have a less “bumpy ride”; the stock price zigs and zags less. Low standard deviation stocks have historically outperformed.
Income Statement Metrics
Revenue: Revenue, otherwise known as sales, is the money coming into a company. It is the money generating from selling a product or service or from other normal courses of business.
Gross Profit: Gross profit is revenue less cost of goods sold. It is profit after deducting the costs of providing the product/service (such as manufacturing), but before all other costs.
Gross Margin: Gross margin is gross profit divided by revenue. It is a measure of how profitable the company’s products/services are before accounting for any business overhead.
SG&A Exp.: SG&A Exp. stands for “Selling, General, & Administrative Expense”. It is the sum of expenses related to selling and managing a business. Common SG&A items include shipping to customers, warehousing, salaries, rent, utilities, and so on.
D&A Exp.: D&A Exp. stands for “Depreciation & Amortization Expense”. These are non cash accounting charges designed to smooth or approximate replacement costs. A classic example of depreciation is the declining value of a vehicle. Amortization is the write-off of an intangible asset over time. An example would be the amortization of a patent.
Operating Profit: Operating profit is earnings before interest and taxes. It looks at how much money the business makes before paying interest on debt and government taxes.
Op. Margin: Op. Margin stands for “Operating Margin”. It is calculated as operating profit divided by revenue. Operating margin shows the percentage of sales that the company keeps as income before paying interest and taxes.
Net Profit: Net profit is the ‘bottom line’. It is what’s left of sales after paying all expenses, including depreciation, amortization, interest, and taxes.
Net Margin: Net margin is net profit divided by revenue. Net margin shows the percentage of sales left after all expenses are paid.
Free Cash Flow: Free cash flow measures how much actual cash the company generated through business operations. There are several ways to calculate free cash flow. One common way is to take cash flow from operations and subtract out capital expenditures. Free cash flow uses capital expenditures (actual money going out) instead of depreciation and amortization (accounting idea of what would go out on smoothed basis).
Balance Sheet Metrics
Total Assets: Total assets are the sum value of all the things a company owns, including cash, receivables, intangible assets, property, equipment, and so on.
Cash & Equivalents: Cash and equivalents are a part of assets. Cash and equivalents measures how much cash and near-cash (think t-bills and other highly liquid short-term debt investments) a company has.
Acc. Receivable: Acc. Receivable stands fro “Accounts Receivable”. It is how much money the company is owed from its customers that it has not yet been paid.
Inventories: Inventory measures the value of finished goods available for sale and works in progress and raw materials.
Goodwill & Int.: Goodwill & Int. stands for “Goodwill & Intangible Assets”.
Total Liabilities: Total liabilities are the sum of a company’s upcoming financial obligations.
Accounts Payable: Money owed to other businesses for products and services provided.
Long-Term Debt: Debt that matures in greater than 1 year.
Total Equity: Equity is value left over after all liabilities are accounted for. Assets minus liabilities equals equity.
Profitability & Per Share Metrics
Return on Assets: Return on assets is calculated as net profit dividend by total assets. It shows how much money a company is making from its assets after accounting for all expenses.
Return on Equity: Return on equity is similar to return on assets, but takes liabilities into account. Companies that can ‘lever up’ will have returns on equity that are multiples higher than returns on assets.
ROIC: ROIC stands for “Return On Invested Capital.” It is calculated as net income divided by the sum of long-term debt and equity. ROIC measures how much money a company is making with the capital at its disposal.
Shares Out.: Shares Out. stands for “Shares Outstanding.” It is the total number of shares of the company, which are used to calculate per-share metrics.
Revenue/Share: Revenue divided by shares outstanding.
FCF/Share: Free cash flow divided by shares outstanding.