Replies to post #418 on A.I.M. Value Line Stocks (aim_VL)

[OldAIMGuy]

Hi Kavi, Re: Value Line's 100 shining stars.............

Your question is very good. If you note at the top of the page there in Value Line (page 39) they say,
"To be included, a company's annual growth of sales, cash flow, earnings, dividends and book value must together have averages XX% or more over the past ten years and be expected to average at least XX% in the coming 3-5 years."

So, they're accounting for that rather underwhelming book value growth in their overall calculation but how they do it is their own proprietary ideal. I guess we can surmise that the fat dividend growth rate compensates in their analysis for the low book value growth. Since we don't know their method of weighting these separate items, we can't know what the emphasis is. That they recognize Book Value Growth as a component of their analysis is good. The same is true of the higher dividend payers.

As investors we know there's different ways to achieve the "total return" we want. A zero dividend company has to perform in a different fashion than a high dividend company to achieve the same total return for us as investors. We shouldn't ignore either extreme if the total return is generous enough. Value Line's analysis brings together an interesting mix of fundamentals which in turn develops an interesting and diversified list of companies.

If we were to analyse for any of the individual components listed above (and Value Line does screen for several of them) we will find that they tend to be less diversified than this "100 Highest" list. I think this is because some industries tend to get high marks in just one area of focus by the very nature of their businesses.

So, MXIM might be strong in Dividend and Earnings growth and weak in book value growth by the nature of their business. Another company might be a huge free flow cash generator but pay no dividend. Both can make the list by their own merits. Dividends on the list currently range from zilch to 2.4%. In the past there's been some dividend payouts that were as high as 7% (Alliance Capital Management back in 2001, now AB). So the total list is a healthy one, in my opinion.

Hope this helps,
Tom