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Equity Perspectives

The Lord Abbett Calibrated Dividend Growth strategy seeks to deliver attractive total return by identifying undervalued stocks among a universe of companies with a history of increasing their dividends.  

Q. What’s the idea behind the Calibrated Dividend Growth strategy?
A. The strategy seeks current income and capital appreciation from high-quality companies with an impressive record of consistently increasing their dividends and weathering down-markets.

Q. What does the strategy invest in?
A. We focus on a stock universe of large and mid-sized U.S. companies with consistent dividend  growth that have a lower risk profile than the broader market , since they are often market leaders with stable business models and strong balance sheets . 

Q. Can you elaborate on high quality?
A. One way to define quality is to think of it as a blend of four attributes, according to an April 2013 report by the Leuthold Group. The first measure is top-line quality, meaning companies that generate stable and growing revenues. The second is bottom-line quality, meaning companies with stable and growing earnings and cash flows, as well as a predictable earnings stream. Then there is balance-sheet quality, since lower leverage generally lowers the risk of bankruptcy. And last, but by no means least, is the quality of stock returns, with particular attention to low price volatility and the level and growth of dividends.1 Our viewpoint is that many companies in the Calibrated Dividend Growth portfolio have these quality attributes. 

Q. Are there benefits to investing in higher-quality companies?
A. A great benefit of focusing on companies with a history of consistent dividend growth is those dividend growers also tend to be higher-quality stocks. Moreover, research shows that dividend growers, as represented by the S&P 900® 10-Year Dividend Growth Index,2 have a lower downside capture3 [i.e., stocks that tend to perform better when markets are declining] than the S&P 500® Index.4  In addition, 86% of the dividend growth stocks considered for inclusion in this strategy are in the top two tiers of the Value Line Investment Survey’s safety ranking. (See Chart 1.) 

 

Chart 1. Calibrated Dividend Growth Strategy Evaluates Stock Risks 
Allocation by Value Line SafetyTM Rank, (a Measure of the Total Risk of a Stock compared to all others in Value Line's approximately 1700-stock universe).

Source: Value Line Investment Survey and Russell.
This chart is for illustrative purposes only and does not represent the performance of any Lord Abbett Fund, nor is it intended to predict or depict performance of any Lord Abbett Fund or any investment product.  Value Line’s Safety Rank reflects potential risk of individual Fund holdings and does not reflect the potential risk of the Fund.
The Value Line Investment Survey® is a nearly 80-year-old research service well known for a system that ranks stocks for timeliness and safety.  The safety rank measures the total risk of a stock relative to the approximately 1,700 other stocks.  Safety ranks are also given on a scale from 1 (highest) to 5 (lowest), as follows: Rank 1 (highest): These stocks, as a group, are considered the safest, most stable, and least risky investments relative to the Value Line universe; Rank 2 (above average): These stocks, as a group, are considered safer and less risky than most.; Rank 3 (average): These stocks, as a group, are of average risk and safety. Rank 4 (below average). Rank 5 (Lowest): These stocks, as a group, are the riskiest and least safe.  However, the number of stocks in each category from 1 to 5 may vary. The Safety rank is derived from two measurements (weighted equally): a Company’s Financial Strength and a Stock’s Price Stability. Financial Strength is a measure of a company’s financial condition, and is reported on a scale of A++ (highest) to C (lowest). The largest companies with the strongest balance sheets get the highest scores.  As Value Line puts it, ”Safety becomes particularly important in periods of stock market downswings, when many investors want to try to limit their losses.”

 

Q.  Why do dividends matter so much?
A.  According to Ned Davis Research, concentrating on dividend growers historically has generated superior long-term returns over the last 40 years.  And a seminal study5 by three professors from the London Business School found that over any significant period, reinvested dividends account for at least 40% of total return. "While year-to-year performance is driven by capital appreciation, long-run returns are heavily influenced by reinvested dividends," the authors said. "The longer the investment horizon, the more important is dividend income.”

Q.  Anything else?
A.  Dividend growth strategies tend to be less interest-rate sensitive, which may be particularly timely now, with interest rates at historical lows and our expectation of a general increase in interest rates in the not-too-distant future.   Dividend yield6 strategies, on the other hand, may be more likely to face headwinds in a higher interest rate environment.

Q. How is this strategy managed?
A. The management process for the Calibrated Dividend Growth strategy is similar to that used with other strategies in our Calibrated Suite. All those strategies follow a rigorous, active management approach that combines insightful fundamental and quantitative investment research.

Q. How would you describe your research discipline?
A. We follow an integrated approach that combines insights derived from fundamental research with a proprietary valuation model. The team seeks to identify stocks that it believes to be selling below their true value.

Q. What do you look for?
A. Our research analysts investigate a wide range of factors to develop expectations for an individual company. These include the outlook for new products, shifts in the competitive landscape, changes in executive management, and trends in the company’s balance sheet. Our analysts use these inputs, as well as others, to develop proprietary projections for each company’s near-term earnings, intermediate-term EPS [earnings per share7] growth rate, long-term earnings potential and sustainable dividend payout ratio.

Q. Does the focus on consistent dividend growers lead you to some sectors more than others?
A. Yes, there are currently more consistent dividend growers in the consumer staples, industrial, and materials sectors, so those sectors currently have a larger weighting in our portfolio than they have in the S&P 500 Index.  

Q. Conversely, are there sectors that fall short of your dividend growth criteria?
A. Yes, there are currently relatively few information technology and financial companies that pass the 10-year threshold of dividend growth, so we currently have less weighting in information technology than in the S&P 500 Index as a whole. However, that can change if more tech and financial companies are successful in achieving a sustained record of dividend growth.

Q. What do you believe will be the biggest factor in the performance of the strategy?
A. Over time, we would expect that the majority of the strategy’s outperformance in relation to the benchmark S&P 900 10-Year Dividend Growth Index would be the result of our stock selection and ability to pinpoint when attractive stocks are overvalued and when they’re undervalued. 

For more information see our Calibrated Dividend Growth strategy.  

 

1 Jun Zhu and Eric Weigel, "Quality as an Investable Stock Selection Concept," Inside the Stock Market, The Leuthold Group, April 2013.  According to Leuthold, investors have generally been rewarded for holding high-quality stocks in their portfolios regardless of sector composition. "The outperformance of high-quality stocks is quite variable over time, with periods of market stress being the most advantageous from a relative performance basis," said Leuthold analysts Jun Zhu and Eric Weigel. Low-quality stocks are generally defined as companies that tend to have a lot of debt, poor balance sheets, and inconsistent and unpredictable earnings. Such companies also would run the greatest risk of going bankrupt.
2 The S&P 900® 10-Year Dividend Growth Index is a subset of the S&P 900 Index. The index consists of large and mid-sized companies that have a ten-year history of dividend issuance and growth, and that meet certain other criteria. The Dividend Growth Index represents a considerably narrower investable universe than them S&P 900 Index because of these stringent criteria. The Dividend Growth Index is a custom index that was developed at the request of Lord Abbett. The Dividend Growth Index is the exclusive property of Standard & Poor’s Financial Services LLC. Under a contract with Lord Abbett, S&P administers, maintains, and calculates the Dividend Growth Index.  S&P and its affiliates shall have no liability for any errors or omissions in calculating the Index.
3According to the New York State Society of Security Analysts, upside and downside capture ratios are commonly used to determine how much an investment participates in the upside or downside of the market. Upside capture compares an investment's performance against its benchmark during periods when the benchmark's performance is positive, while downside capture compares the investment's performance against the benchmark during periods when the benchmark's performance is negative. 
4 The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.
5Elroy Dimson, Paul Marsh, and Mike Staunton, Credit Suisse Global Investment Returns Sourcebook 2009, February 2009. The London Business School authors are considered global authorities on long-run stock, bond, bill, and foreign exchange performance.
6Dividend yield is equal to the dividend divided by the stock price. Dividend yield is one measure of a stock's value. A high dividend yield may indicate that a stock is relatively inexpensive. 
7Earnings per share is the portion of a company’s profit allocated to each outstanding share of common stock and is a measure of a company’s profitability.

 

®2014. Value Line, Inc.  All Rights Reserved.  Value Line, the Value Line Investment Survey, Timeliness and Safety are trademarks or registered trademarks of Value Line Inc. and/or its affiliates in the United States and other countries.

Portfolio holdings and characteristics of the Fund will differ from those of the index, and such differences may be material.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

Risks to Consider:  The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies, including market, liquidity, currency, and political risks. Mid cap company stocks tend to be more volatile and may be less liquid than large cap company stocks. Mid cap companies typically experience a higher risk of failure than large cap companies. However, larger companies may be unable to respond quickly to certain market developments and may have slower rates of growth as compared to smaller successful companies. A company's dividend payments may vary over time, and there is no guarantee that a company will pay a dividend at all.

No investing strategy can overcome all market volatility or guarantee future results.

Neither diversification nor asset allocation can guarantee a profit or protect against loss in declining markets.

Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company.

ABOUT THE MANAGER

FUND DETAILS
The Fund seeks to deliver total return by investing primarily in stocks of large U.S. companies that have a history of increasing their dividends.

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