Standard and Poor’s Capital IQ stock reports offers an intriguing insight into a company’s history of creating shareholder value over the longer term. Known as the “Quality Rating” S&P rates companies on a very important matrix – earnings and dividend growth over the previous ten years. Long-term investors rely on these two fundamentals to drive share prices higher over time.
RIA firm QVM Group offers a good recap of the criteria on their website:
“The starting point in the ranking process is a computerized scoring system based on per-share earnings and dividend records over the most recent 10-year period, a time period sufficient to measure a company’s performance under varying economic conditions. The system measures growth, stability within the trend line, and cyclicality. From these, scores for earnings and dividends are determined. The system makes allowances for company size, since large companies have certain inherent advantages over smaller ones.
Once computed, a final score is measured against a scoring matrix. The results are reviewed and sometimes modified, because no mechanical system can evaluate the many special considerations that could affect a company’s earnings and dividend record.
The Standard and Poor’s Earnings and Dividend Ranking System have seven grades:
A+, A, and A- are above average;
B+ is average;
B, B-, and C are below average;
An NR designation (no ranking) is given to common stocks with insufficient historical data or because the stock is not amenable to the ranking process. As a matter of policy, Standard & Poor’s does not rank the stock of foreign companies, investment companies, or certain finance-oriented companies;
D signifies a company in reorganization.”
S&P Capital IQ reports should be a staple of most brokers’ research offerings. Investors should be reviewing their on-line broker’s research offerings and utilizing them for specific due diligence information. As investors develop overall criteria for stock selection, the Quality Rating should be included as a basic rating to review. A+ is the highest ranking offered. S&P Capital IQ follows about 1500 companies and there are only 47 companies included in the A+ category.
Some broker's stock search criteria include Equity Ratings as a screening tool. Fidelity allows clients to use this criteria as one of the fundamental screening options. It is then possible to develop a complete listing of all companies that fall within a specific equity rating. For example, this screen could generate a list of all companies rated A+ and A, only.
Of these 47 highest rating companies, My Investment Navigator closely follows 15.
The sectors with A+ ratings are not equally distributed, with the majority falling into industrial and consumer sectors. Combined, these two sectors comprises about 45% of companies rated A- and higher. Technology, Energy and Financials comprise 4.8%, 3.3% and 5.8%, respectively.
Another easy method of finding stocks rated as A- and better is to review the holdings of the PowerShares High Quality ETF (SPHQ). This ETF follows the S&P 500 High Quality Rating Index The Index information can be found here:
The index include companies that are rated A- and higher and who are included in the S&P 500 Index. Of the 500 companies in the Index, about 130 qualify for this rating. To be included in this index, the major characteristics would be to be a larger cap firm in the S&P 500 and to generated above average high earnings and dividend growth from 2003 to 2013.
This time period include the Great Recession. Reviewing ratings prior to mid-decade and comparing them to the current ratings would find the biggest change would be in the financial sector. Both earnings and dividends were hard hit and reflect the majority of financial sector ratings in the B range, B- to B+.
S&P Quality Ratings should be reviewed as a basic research tool. For example, conservative, long-term investors may want to include mainly higher rated companies in their portfolio selections.
I appreciate your time and interest in Guiding Mast Investments, George Fisher