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 Watkin Jones, for example, which is a balanced super stock company in the Financials sector. The group is a United Kingdom-based construction company that develops and manages properties.
Watkin Jones pays out a rolling 3.58% 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.
Watkin Jones (LON:WJG), 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 Watkin Jones scores 8 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 Watkin Jones is a promising investment candidate and is worthy of further research - but it is only a first step. It has been proven that higher F-Score stocks often trade at a premium compared to other stocks. Investors like to pay up for quality but its important not to pay too much.
Disclaimer: These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. The author has no position in the stocks mentioned, unless otherwise stated.