If you find a well-covered, steadily rising dividend payment paired with strong and improving financial health, chances are you are looking at a high-quality company.
Take Brambles (ASX:BXB), for example, which is a conservative high flyer company in the Basic Materials sector.
Brambles pays out a rolling 4.71% of its share price in dividend payments. I'd like to know if it can continue paying out this dividend. A good starting point would be to analyse any improvement or deterioration in financial health.
This is exactly what the Piotroski F-Score is designed to do.
Why you need to know the Piotroski F-Score
Celebrated accounting professor Joseph Piotroski is the man behind the F-Score: a simple indicator to highlight stocks showing the most likely prospects for outperformance amongst a basket of apparently undervalued companies.
The great thing about the F-Score is that it essentially is an entire quality and fundamental momentum screen in a single number. It's made up of nine checks separated into three main areas of financial analysis. First is profitability, where it examines operating profits and cash flow to make sure the business can sustain itself and pay dividends. Then come three checks on the capital structure of a business, followed by a final look at the firm’s operating efficiency.
Stocks scoring 8 or 9 are considered strong. Those scoring 2 or less are considered weak.
Brambles, its F-Score, and what you need to do about it
Stockopedia applies algorithms to its stream of financial data to automatically calculate the Piotroski F-Score for every stock on the market. It shows that Brambles scores 9 out of a possible 9.
By investing in companies scoring 8 or 9 by these measures, Piotroski showed that, over a 20-year test period through to 1996, the return earned by a value-focused investor could be increased by an astounding 7.5% each year. Even better, it suggests that the company is well-placed to continue to pay out attractive dividends.
Find more high-quality stocks
This F-Score suggests Brambles is a promising investment candidate and is worthy of further research - but it is only a first step. Higher F-Score stocks often trade at a premium compared to other stocks. Investors like to pay up for quality but it's important not to pay too much. We suggest checking the various value factor measures for Brambles on the group's StockReport.
For years, the Stockopedia team have been poring over studies to see what works in investing. That's how we found the F-Score, but that's not all we've found... So take a two-week free trial today to see how Stockopedia can help you to build a better portfolio.