Sunday, 23 October 2011: 9:20 AM
David T. Cadden, Ph.D.
,
Management, Quinnipiac University, Hamden, CT
Mark Thompson, Ph.D.
,
Quinnipiac University, Hamden, CT
Vincent Driscoll, Ph.D.
,
School of Business, Quinnipiac University, Hamden, CT
Andrew Merrick, B.S.
,
Quinnipiac University, Hamden, CT
The financial community and individual investors are always looking for indicators that might signal those securities or portfolios that yield above average returns. There is a large literature that examines how various financial variables such as dividend-price ratios, earnings-price ratios, dividend-earnings ratios might be used to predict stock price performance. O’Hara, Lazdowski, Moldovean, and Samuelson (2000) examined three variables – dividends per share, earnings per share, and cash flow per share – for 1,700 stocks over a 17 year period 1983-2000. They found that those stocks with 17 years of consistent growth on those three variables consistently outperformed the S&P 500 market measure in both up and down markets. They saw that the 17 year consistent growth requirement was a restrictive constraint since few securities could be expected to have such dependable growth. They recognized that it may contain a “survivor bias” and they suggest a reduction of this time line. This paper pursues that argument by examining a number of shorter time periods such as 4 years (of consistent growth), 8 years (of consistent growth), 12 years (of consistent growth) and 16 years (of consistent growth). {Ideally, this research should include intervening time periods – 5 years, 6 years, etc., but time constraints forced us to begin with these equal time increments.} Whereas they examined stocks for one seventeen year period (1981-1997), we look at the stocks for the period 1990 – 2009. Using the CRSP data base we selected approximately 5,000 securities.
Using the 4 year growth segment as an example, we determine the number of stocks that had four years of prior data starting in 1990 and determine the number of stocks that meet our criteria in each year for the period 1993-2009. The criteria are based on the three individual financial variables and the possible combination of these variables. The possible combinations of variables produce seven categories based on the three variables – see Table 1. For each of the seven categories we compute the percentage of firms that had 4 years of consistent growth in each of the seven categories, the annual average return for the securities that did and did not meet the criteria of the seven categories and the compound annual return for each year. This compound annual return is determined by applying a logarithmic formula to the stock's closing price for each time period. Finally, we compare each categories return to the S&P 500’s return and the Wilshire 5000’s return for the period 1993-2009.
Table 1
Portfolio #
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Portfolio Description
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A
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Dividends Increase N number of Consecutive Years
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B
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Cash Flow/Share Increase N number of Consecutive Years
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C
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EPS Increase N number of Consecutive Years
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D
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Both Dividends and Cash Flow/Share Increase N number of Consecutive Years
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E
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Both Dividends and EPS Increase N number of Consecutive Years
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F
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Both Cash Flow/Share and EPS Increase N number of Consecutive Years
|
G
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Dividends, Cash Flow/Share and EPS all Increase N number of Consecutive Years
|
