Compound Income
  • Blog
  • Scores
  • Portfolio
    • Table of Returns
  • Resources
    • Check list
  • About
  • Contact



Getting better...

27/2/2015

0 Comments

 
...by a process of continual improvement or Kaizen the Japanese term for this which became prominent in the 1980's when it seemed that Japanese businesses were dominating the world and their stock market was on a crazy rating which it has never recovered from to this day. Any way that doesn't stop the principle being a good one and with that in mind I have been applying it to the Compound Income Scores this week.

If you are a regular reader you may recall that I recently added an extra column to these to calculate an estimated sustainable growth rate to help with longer term projections. So this week I have hopefully taken this to its logical conclusion and introduced some suggested expected return columns. These are based on the forecast, five year historic dividend growth and the suggested sustainable rate which are already in the sheet.

By way of explanation, these are simply the current yield plus the calculated growth rate. I have headed these columns up:
MIN (the lowest growth rate for a conservative estimate), MEDIAN (the middle growth rate) AVERAGE (the average of all three) and MAX which should be self explanatory. Obviously as I say this is a simple suggested expected return and actual outcomes are likely to differ depending on how the market overall moves and if the stock concerned get re-rated or de-rated over and above the movement in the dividend or if the company ends up disappointing or surprising on the upside in the short term.

How should you use this? Well I think you would do well to take these figures into account when picking your stocks and compare it to the valuation, which is what the EVER ratio on the sheet does using the one year growth forecast.
if a stock is highly rated there is a risk that the growth may not come through in the rating or it could be more vulnerable to a de-rating if it disappoints.

Overall I would tend to look for an expected return on this measure of 7 to 9% or say 8% on average and you might want to look for say 10%+ which is a nice round figure for a margin of safety, especially if you are looking at a smaller or AIM listed stock. However, this type of analysis is probably of most use for steady growing / compounding type stocks. As those with a low minimum figure will probably reflect limited growth or previous cuts so you may not be able to rely on them delivering consistently in the future. I would also tend to ignore the maximum figure because again this may just reflect dividends being reintroduced from a low base, an artificially high ROCE  or a short term ramp up in the dividend which may not be sustained in the long run.

Now why do I say you should look for 8% or so suggested return?

Well, in the long run the average real (after inflation) returns from UK equities have been 5.3% per annum since 1900 and 6.2% between 1965 & 2014 (Source: Credit Suisse Global Investment Returns Year Book 2015 - see page 57 in file attached at end of this note.) So lets say 5.5% for the sake of argument. So since you are looking at equities here it would seem logical to want to at least get an average and preferably, an above average real return on your investment for taking on equity risk. There is a good discussion of real discount rates and equity risk premiums in the Credit Suisse document starting on page 29 if that is of interest to you, but I'll discuss this in a moment in any event.

You will need to factor inflation into the calculation to compare with the expected return figures. Looking at data from the Office for National Statistics in the UK I note that CPI between 1997 and 2014 has averaged 2.1%, while RPI over the same period has averaged 2.9%. So while the Bank of England likes to target 2% on CPI and you could use that I think I'd prefer to use the average of the two so lets say 2.5% for the sake of argument.

So we now have a suggested long term nominal market return of the expected equity risk premium of 5.5% + inflation assumption of 2.5% = 8%, but of course you could use a higher or lower figure depending on what assumptions you want to make and what margin of safety you want to factor in to allow for disappointments.

I would then tend to combine this expected return figure with looking at the valuations. Ideally you might be able to find a stock with a decent yield - say 3%+ combined with a reasonable PE of say less than 15x and a decent earnings yield of 7 to 8%+ and a better than average Compound Income Score. However with regard to these figures and the Compound Income Scores, please
remember to use them as a guide to potentially attractive shares which may be worthy of further research, as you need to assess the underlying business and its likely prospects which underpin the numbers.

Hope you find this useful - the Scores have been updated today to include these return columns. If you are not already signed up and would like to gain access to them then please read more about them and how to sign up here.


global-investment-returns-yearbook-2015-v3.pdf
File Size: 2091 kb
File Type: pdf
Download File

0 Comments



Leave a Reply.

    RSS Feed

    Google+

    Archives

    December 2020
    November 2020
    October 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    August 2019
    June 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014

    Categories

    All
    32Red
    Aberdeen Am
    Admin
    A G Barr
    Alliance Pharma
    Alternative Telecoms
    AMEC
    Amino Technologies
    Amlin
    Anglo Pacific
    Asset Allocation
    Auto Trader Group
    BA Systems
    BATS
    Behavioural Finance
    Bellway
    Berendsen
    BHP Billiton
    Bloomsbury Publishing
    Bodycote
    Books
    Bovis Homes
    BREXIT
    Britvic
    Catlin-group
    Central Asia Metals
    Centrica
    Character Group
    Churchill China
    Cineworld
    City Of London Investment Group
    Clarkson
    Commercial Property
    Compound
    Computacenter
    Connect Group
    Croda
    Currencies
    Demographics
    Diageo
    Diploma
    Directors Dealings
    Dividends
    Easyjet
    Economics
    Emerging Markets
    Emis
    Empiric Student Property
    Etfs
    Fairpoint
    Ferguson
    Ferrexpo
    Finsbury Foods
    Food Retailers
    Forterra
    Games Workshop
    Gateley
    Go Compare
    Goid
    Greene King
    GSK
    Hargreaves Services
    Hays
    Headlam
    Hedge Funds
    Hill & Smith
    House Builders
    Howden
    HSBC
    IG Group
    Imperial Tobacco
    Indivor
    Inflation
    Insurance
    Intermediate Capital
    Interserve
    Investec
    Investment Trusts
    It
    ITV
    James Halstead
    Jarvis Investment Management
    JLT
    Jupiter Fund Management
    KCOM
    Kingfisher
    Legal & General
    Lloyds Bank
    Maintel
    Man Group
    Market Timing Indicator
    Market Valuation
    Marston's
    Matchtec
    Media
    Merlin Entertainment
    Micro Focus
    Mining
    Mitie
    Miton Group
    Moenysupermarket
    Mondi
    Moneysupermaket.com
    Music
    National Grid
    N.Brown
    News
    Next
    Nichols
    Norcros
    Oil
    Page Group
    Paypoint
    Pennon
    Persimmon
    Personal Finance
    Pharmaceuticals
    Phoenix Group
    Photo Me
    Photo-Me
    Plus500
    Podcasts
    Polar Capital
    Politics
    Portfolio
    Portmeirion
    Provident Financial
    PZC
    Qinetiq
    Ramsdens Holdings
    Rank Group
    Reckitt Benckiser
    Renewable Energy
    Renew Holdings
    Renishaw
    Research Papers
    Restaurant Group
    Retailers
    RIO
    RM Group
    Rolls Royce
    RPC
    RPS
    Safestore
    Sainsburys
    Savills
    Schroders
    Scores
    SCS Group
    Sell Discipline
    Shareholder Yield
    Share Picks
    Short Interest
    Somero
    Spectris
    Sprue Aegis
    SSE
    Stock Spirits
    S & U Plc
    TalkTalk
    Taptica
    Tax
    Technology
    Telecoms
    Tobacco
    Trading Ideas
    TSB
    TUI
    UK Market Update
    Unilever
    Utilitywise
    Value
    Victrex
    Vodafone
    VP.
    Water Utilities
    WH Smiths
    William Hill
    Wynstay
    XL Media
    XP Power
    Yield
    Zytronic

    googleda4a17cac6d02bb9.html
    File Size: 0 kb
    File Type: html
    Download File

Powered by Create your own unique website with customizable templates.
  • Blog
  • Scores
  • Portfolio
    • Table of Returns
  • Resources
    • Check list
  • About
  • Contact