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To create the list below we began with a universe of dividend stocks paying yields between 2% and 5%, and sustainable payout ratios below 50%. We chose this range to stay away from the more high-risk and unsustainable yields. We then screened for stocks that have outperformed the market over the last quarter, with quarterly performance above 10%.

Finally, we screened for those that appear undervalued relative to the Graham Number. The Graham Number is a measure of maximum fair value created by the "godfather of value investing" Benjamin Graham.

It is based on a stock's EPS and book value per share (BVPS).

Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS)

The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5. Stocks trading well below their Graham Number may be undervalued.

Our final list consisted of 5 stocks. Notice that they are all financials.

The List

For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.

Do you think these financials should be trading higher? Use this list as a starting point for your own analysis.

1. The Allstate Corporation (NYSE:ALL): Engages in the personal property and casualty insurance, life insurance, retirement, and investment products businesses primarily in the United States.

  • Market cap at $23.24B, most recent closing price at $48.67.
  • Diluted TTM earnings per share at 4.68, and a MRQ book value per share value at 42.97, implies a Graham Number fair value = sqrt(22.5*4.68*42.97) = $67.27. Based on the stock's price at $48.22, this implies a potential upside of 39.5% from current levels.
  • Dividend yield at 2.1%, and payout ratio at 19%. Performance over last quarter at 11%.
  • Other considerations: Based on conventional valuation ratios, Allstate looks cheap relative to competitors. The stock's PEG ratio stands at 1.23, while its Price/Cash ratio stands at 29.19. Even on a Price to Free Cash Flow basis the stock looks cheap, with a ratio of 10.53, compared to American International Group, Inc. (P/FCF ratio at 15.62) and Berkshire Hathaway Inc. (P/FCF ratio at 22.78).

2. Associated Banc-Corp (NASDAQ:ASBC): Offers various banking and financial services to individuals and businesses primarily in Wisconsin, Illinois, and Minnesota.

  • Market cap at $2.55B, most recent closing price at $15.22.
  • Diluted TTM earnings per share at 1, and a MRQ book value per share value at 16.97, implies a Graham Number fair value = sqrt(22.5*1*16.97) = $19.54. Based on the stock's price at $15.22, this implies a potential upside of 28.39% from current levels.
  • Dividend yield at 2.2%, and payout ratio at 23%. Performance over last quarter at 16%.
  • Other considerations: The company has reported strong earnings growth over the last year, with EPS growing by 52.44%, higher than competitors like Comerica Incorporated (EPS growth over the last year at 28.25%) and Huntington Bancshares Incorporated (EPS growth over the last year at 19.58%).

3. Flushing Financial Corp. (NASDAQ:FFIC): Provides banking products and services primarily to consumers and businesses.

  • Market cap at $518.45M, most recent closing price at $16.80.
  • Diluted TTM earnings per share at 1.13, and a MRQ book value per share value at 14.6, implies a Graham Number fair value = sqrt(22.5*1.13*14.6) = $19.27. Based on the stock's price at $16.37, this implies a potential upside of 17.7% from current levels.
  • Dividend yield at 3%, and payout ratio at 46%. Performance over last quarter at 12%.
  • Based on conventional valuation ratios, Flushing Financial looks cheap relative to competitors. The stock's PEG ratio stands at 2.07, while its Price/Cash ratio stands at 12.52. Even on a Price to Free Cash Flow basis the stock looks cheap, with a ratio of 9.37, compared to People's United Financial Inc. (P/FCF ratio at 21.35) and New York Community Bancorp Inc. (P/FCF ratio at 63.47).

4. Fulton Financial Corporation (NASDAQ:FULT): Offers retail and commercial banking products and services in Pennsylvania, Delaware, Maryland, New Jersey, and Virginia.

  • Market cap at $2.34B, most recent closing price at $11.77.
  • Diluted TTM earnings per share at 0.8, and a MRQ book value per share value at 10.45, implies a Graham Number fair value = sqrt(22.5*0.8*10.45) = $13.71. Based on the stock's price at $11.75, this implies a potential upside of 16.72% from current levels.
  • Dividend yield at 2.75%, and payout ratio at 37%. Performance over last quarter at 22%.
  • Despite the undervaluation from the Graham number, when comparing valuation ratios to industry averages, Fulton Financial looks expensive. The stock's Price / Free Cash Flow ratio stands at 12.07, much higher than M&T Bank Corporation (P/FCF ratio at 0) and Signature Bank (P/FCF ratio at 0).

5. Huntington Bancshares Incorporated (NASDAQ:HBAN): Provides commercial and consumer banking services.

  • Market cap at $6.25B, most recent closing price at $7.41.
  • Diluted TTM earnings per share at 0.71, and a MRQ book value per share value at 6.41, implies a Graham Number fair value = sqrt(22.5*0.71*6.41) = $10.12. Based on the stock's price at $7.38, this implies a potential upside of 37.12% from current levels.
  • Dividend yield at 2.17%, and payout ratio at 23%. Performance over last quarter at 17%.
  • More undervalued signals: Huntington Bancshares looks cheap relative to competitors. The stock's PEG ratio stands at 1.67, while its Price/Cash ratio stands at 4.9. Even on a Price to Free Cash Flow basis the stock looks cheap, with a ratio of 8.79, compared to Comerica Incorporated (P/FCF ratio at 10.06) and TFS Financial Corp (P/FCF ratio at 22.18).

*EPS and BVPS data sourced from Yahoo Finance, all other data sourced from Finviz.

Source: 5 Outperforming Dividend Stocks Undervalued By The Graham Number