The second edition of Security Analysis provided several examples of speculative and investment common stocks. The examples are so illustrative, but they are from 1940. I wanted to bring the text of this section of the book into this blog with examples from several of the stocks that I have blogged about on www.myhighdividendstocks.com .
I chose the following stocks for examples: Goldcorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), Seadrill Limited (SDRL), Safe Bulkers (SB), and AT&T. Let me tell you why I chose these stocks. I wanted to also include Terra Nitrogen (TNH), but the results table would have been too unreadable.
Goldcorp (GG) I used to own Goldcorp when it was priced in the high teens and twenties. I wanted to revisit it because it is also in many gold mining stock funds such as FSAGX. I currently own FSAGX in my 401(k) account and I’m considering selling it. You will see why momentarily.
Proctor & Gamble (PG) This stock is often written about in dividend aristocrat articles. It pays a modest dividend and grows its dividend annually like clockwork. Many people watch this dividend stock.
American Capital Agency Corp. (AGNC) I’ve included it because I have written many articles on this ultra-high dividend stock. I don’t like it because its earnings can’t support the current dividend payout. It balance sheet is horrible like all financial institutions (e.g. banks).
Seadrill Limited (SDRL) This stock turned up on one of my high dividend stock screens and warrants further investigation to determine if it is speculative or investment grade.
Safe Bulkers (SB) I love this high dividend stock with earning power and a strong balance sheet. You will see why in moments.
AT&T (T) I pays almost a 6% dividend and it is and dividend aristocrat. Many eyes are on this one so I want to know at what price is it a value buy.
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Examples of Speculative and Investment Common Stocks. Our definition of an investment basis for common-stock purchases is a variance with the Wall Street practice in respect to common stocks of high rating. For such issues a price of considerably more than 20 times average earnings is held to be warranted, and furthermore these stocks are designated as “investment issues” regardless of the price at which they sell. According to our view, the high prices paid for “the best common stocks” make these purchases essentially speculative, because they require future growth to justify them. Hence common-stock investment operations, as we define them, will occupy a middle ground in the market, lying between low-price issues that are speculative because of doubtful quality and well-entrenched issues that are speculative, none the less, because of their high price.
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There were three groups of examples in Security Analysis. Group A were common stocks speculative in December 1938 because of their high price (figures were adjusted to reflect changes in capitalization). The companies in group A were: General Electric, Coca Cola, and Johns-Manville. Proctor & Gamble and AT&T sort of fit into the Group A category.
Group B were common stocks speculative in December 1938 because of their irregular record. Group B in 1938 was comprised of the following companies: Goodyear Tire and Rubber, Simmons, and Youngstown Sheet and Tube. American Capital Agency Corp., Seadrill Limited and Goldcorp are definitely Group B. Goldcorp also has a poor divided and a high price. AGNC is irregular with a high price.
Group C were common stocks meeting investment tests in December 1938 from the quantitative standpoint. They included Adams-Millis, American Safety Razor, and J.J. Newberry. I have never heard of any of these stocks. The only stock in my example that makes this cut is Safe Bulkers. This is why Safe Bulkers is in my best dividend stocks category.
Item | Goldcorp (GG) | Proctor & Gamble (PG) | American Capital Agency Corp. (AGNC) | Seadrill Limited (SDRL) | Safe Bulkers (SB) | AT&T (T) | ||||
Dividend Yield | 0.84% | 3.14% | 19.50% | 7.46% | 6.85% | 5.77% | ||||
Earnings per share | ||||||||||
2001 | ? | ? | - | - | - | ? | ||||
2002 | ? | ? | - | - | - | ? | ||||
2003 | ? | ? | - | - | - | ? | ||||
2004 | ? | ? | - | - | - | ? | ||||
2005 | $0.35 | ? | - | - | ? | ? | ||||
2006 | $0.51 | $3.05* | - | $0.56 | $1.48 | $1.24 | ||||
2007 | $0.58 | $3.64* | - | $1.32 | $3.18 | $2.02 | ||||
2008 | $1.85 | $4.25* | $0.28 | ($0.43) | $1.81 | $2.18 | ||||
2009 | $0.30 | $4.73* | $0.94 | $3.31 | $2.51 | $2.05 | ||||
2010 | $1.64 | $4.47* | $2.30 | ? | $1.66 | $3.36 | ||||
10-yr. average | ? | ? | - | - | - | ? | ||||
5-yr. average (2006-2010) | $0.98 | $4.03 | 3-yr. average $1.17 | 4-yr. average $1.19 | $2.13 | $2.17 | ||||
12 times 5Y average earnings | $11.71 | $48.36 | $14.08 | $14.28 | $25.56 | $26.04 | ||||
20 times 5Y average earnings | $19.60 | $80.60 | ||||||||
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