The Art and Science of Value Investing
Investing in under-valued, dividend-paying stocks with improving fundamentals provide upside potential and may reignite investor interest. A disciplined process including evaluating dividends, valuations and fundamentals is the hallmark of Ceredex.
Mills: Our investment process really focuses on three key factors, dividends, valuation and fundamentals. All three of those factors have to come together for stock to be put into the portfolio. We start with dividends principally because we believe that it gives us very, very valuable insight into the earnings power of a company primarily because managements are loathe to cut dividends once they’ve established them. So they don’t establish a dividend policy unless they’re quite certain or very confident in the earnings outlook of a company and to use those earnings to pay those cash dividends.
Don: [00:00:29] Why dividends, you know, dividends provide investors three very important things. Dividends are an important source of your total return. Dividend stocks historically have had lower volatility. But the piece of information that most investors miss about dividends is that is a signal that a management team or board of directors with an active dividend policy, the signal they’re sending the marketplace about the health of the business model, how they feel about the health of the business model. So we feel like having that dividend criteria is another thing that sets us apart from our competition.
Mills: [00:01:02] Secondly, we focus on valuation. What we’re really simply trying to do at this point is take dividend paying stocks and find out which stocks are trading cheap versus their history, typically in the lower third of the valuation range.
Don: [00:01:14] And finally we’re fundamental investors, so that’s where we spend 80% of our time, digging into fundamentals, carrying through 10 K’s, 10 Q’s, calling managements, calling suppliers, going to industry conferences and roadshows and analyst days. Trying to build a fundamental story around why we think the expectations are too low for any particular security.
Mills: [00:01:32] For us, equity investing is really is part art and part science. It’s very easy to get caught up in the science side of investing where you’re looking at data gathering and data processing almost exclusively. But really the third component to us which is really the interpretation of the data and the data processing really is the art of equity investing.
DISCLOSURES: The assertions contained herein are based on Ceredex's opinion. This information is general and educational in nature and is not intended to be authoritative. All information contained herein is believed to be correct, but accuracy cannot be guaranteed. This information is based on information available at the time, and is subject to change. It is not intended to be, and should not be construed as, investment advice. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decisions. ©2015 Ceredex Value Advisors LLC is a registered investment adviser with the SEC and a member of the RidgeWorth Capital Management LLC network of investment firms.