Based on Grey and Vogel’s research paper called “Analyzing Valuation Measures: A Performance Horse-Race over the past 40 Years,” the best valuation measure wasn’t the classic price-to-earnings (P/E) ratio. It’s something similar to the P/E ratio though, with a more intimidating name: “EV-to-EBITDA.”
Grey and Vogel found that buying the cheapest 25% of stocks based on EV/EBITDA returned 17.66% a year from 1971-2010. This beat buying cheap stocks based on the P/E ratio, which returned just 15.23% a year over the same time.
My idea is to apply the EV/EBITDA metric to dividend stocks. It makes sense to buy dividend stocks at a lower value which gives the investor higher dividend rate of pay while waiting for a stock price increase to a higher valuation. I am looking at stocks with a dividend yield of at least 3% and a return on equity of at least 10%. The table below shows the best stocks meeting the criteria along with their EV/EBITDA ratios.
The list is loaded with companies in the oil industry with EV/EBITDA ratios below 5.0 such as: StatOil (STO), Marathon Oil (MRO), Total (TOT), ConocoPhillips (COP), and Chevron (CVX). Among this group, TOT has the highest dividend yield at 5.0% with an EV/EBITDA of 3.23.
The telecom industry is well represented by companies such as Telecom Argentina (TEO), China Mobile (CHL), P.T. Telekomunikasi Indonesia, (TLK), BT Group plc (BT) and Telefonos de Mexico SA de CV Co (TMX). TLK has a 7.2% dividend yield with an EV/EBITDA of 4.01.
