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Golden Rule #2 - Past Financial Performance

Management quality and leadership capabilities are important factors when assessing the ability of a company to fulfil its financial and strategic objectives.

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For growth seeking investors

Lincoln’s stock selection process is based on a factor investing approach. Based on our internal research, we have identified quantifiable firm characteristics or “factors” that we believe can explain differences in positive stock returns. In assessing growth stocks, the factors we identified include those relating to profitability (ROE, ROIC), profit margins, earnings quality (accruals), earnings and revenue growth. A combination of these factors are applied depending on which sector a stock belongs to.

For income seeking investors

When assessing whether a company meets Golden Rule #2 from an income perspective, we focus on a company’s ability to deliver a consistent and sustainable dividend distribution. The factors we use to identify yield stocks include free cash flow (FCF) per share and operating cash flow per share, as we believe the assessment of cash generation is an appropriate indicator of dividend sustainability. Furthermore, we look at the trend in the payout ratio and the volatililty of earnings. 

Why is past financial performance important?

  • Though a company may have a Strong or Satisfactory Financial Health rating, it is also important that the company is run efficiently, with management delivering on the needs of growth and/or income seeking investors.
  • For growth seeking investors, the factors we believe that can explain differences in positive stock returns include those relating to profitability (ROE, ROIC), profit margins, earnings quality (accruals), and earnings and revenue growth.

  • For income seeking investors, a company's history of high cash generation and low levels of gearing may demonstrate a higher ability to sustain its dividend policy.
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