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Summary

  • OLN, DE, JPM, WFC, and INTC are all suitable for the Defensive Investor following the ModernGraham approach.
  • Each company is rated as undervalued by the ModernGraham valuation model based on Benjamin Graham's formula.
  • All five have strong dividend yields and should be attractive to investors.

There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I've selected five companies with strong dividend yields which have been determined to be undervalued based on a formula taught by Benjamin Graham. Each company has been determined to be suitable for the Defensive Investor, according to the ModernGraham approach, which is a modernized version of legendary value investor Benjamin Graham's requirements for Intelligent Investing.

Defensive Investors are defined as investors who are not able or willing to do substantial research into individual investments, and therefore need to select only the companies that present the least amount of risk. Enterprising Investors, on the other hand, are able to do substantial research and can select companies that present a moderate (though still low) amount of risk. Each company suitable for the Defensive Investor is also suitable for Enterprising Investors.

To be considered by the Defensive Investor, a company must pass at least 6 of the following 7 tests.

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion.
  2. Sufficiently Strong Financial Condition - current ratio greater than 2.
  3. Earnings Stability - positive earnings per share for at least 10 straight years.
  4. Dividend Record - has paid a dividend for at least 10 straight years.
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period.
  6. Moderate PEmg ratio (price over normalized earnings) - PEmg is less than 20
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50.

Note: If the company is a financial or insurance company, test #2 regarding the financial condition is not required; however, the company must pass all six of the remaining tests.

To be considered by the Enterprising Investor, a company must pass at least 4 of the following 5 tests or be suitable for the Defensive Investor.

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5.
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1.
  3. Earnings Stability - positive earnings per share for at least 5 years.
  4. Dividend Record - currently pays a dividend.
  5. Earnings growth - EPSmg greater than 5 years ago.

Note: If the company is a financial or insurance company, tests #1 and #2 regarding the financial condition are not required; however, the company must pass all three of the remaining tests.

The ModernGraham valuation model is based on Benjamin Graham's formula, Intrinsic Value = EPS x (8.5 x 2g), and is intended to give a good estimate of a company's value. ModernGraham uses a normalized EPS figure ("EPSmg") based on the last five years of earnings data, and a cumulative average growth rate based on the change in EPSmg over the last five years. This article on ModernGraham explains some of the background of the formula and performs a simple back-test.

To see the detailed full valuations of each of the following companies, please visit the ModernGraham Valuation Index.

1. Olin Corporation (NYSE:OLN)

Olin Corp is suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor's only concern at this point is the insufficient earnings growth over the last ten years, and the Enterprising Investor's only issue is the high level of debt relative to the current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities. As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.46 in 2010 to an estimated $1.96 for 2014. This solid level of demonstrated growth is greater than the market's implied estimate of 2.51% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham's formula, to return an estimate of intrinsic value above the price.

OLN Chart

OLN data by YCharts

2. Deere & Company (NYSE:DE)

Deere & Co. is suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor's only concern is with the high PB ratio while the Enterprising Investor has no significant concerns. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham's valuation of Caterpillar Inc. (NYSE:CAT). From a valuation side of things, the company appears to be significantly undervalued after growing its EPSmg (normalized earnings) from $3.68 in 2010 to an estimated $7.77. This strong level of demonstrated growth is greater than the market's implied estimate of 1.57% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham's methods, to return an estimate of intrinsic value that is well above the market price at this time.

DE Chart

DE data by YCharts

3. JPMorgan Chase & Company (NYSE:JPM)

JPMorgan Chase is suitable for either Defensive Investors or Enterprising Investors. The company passes all of the requirements of both investor types, which is a rare accomplishment. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company and comparing the company to other opportunities through the ModernGraham Valuation Index. From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.92 in 2010 to an estimated $4.75 for 2014. This strong level of demonstrated growth outpaces the market's implied estimate of only 1.49% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price at this time.

JPM Chart

JPM data by YCharts

4. Wells Fargo & Company (NYSE:WFC)

Wells Fargo qualifies for either Defensive Investors or for Enterprising Investors. In fact, the company passes all of the requirements of both investor types, which is a rare accomplishment. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham's valuation of Fifth Third Bancorp (NASDAQ:FITB). From a valuation perspective, the company appears significantly undervalued after growing its EPSmg (normalized earnings) from $1.83 in 2010 to an estimated $3.56 for 2014. This strong level of demonstrated growth outpaces the market's implied estimate of 3.00% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham's formula, to return an estimate of intrinsic value well above the market price.

WFC Chart

WFC data by YCharts

5. Intel Corporation (NASDAQ:INTC)

Intel Corporation is suitable for either the Defensive Investor or the Enterprising Investor. The company passes all of the requirements of both investor types, which is a rare accomplishment. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.27 in 2010 to an estimated $2.09 for 2014. This level of demonstrated growth outpaces the market's implied estimate of 3.91% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham's formula, to return an estimate of intrinsic value above the price.

INTC Chart

INTC data by YCharts

Source: 5 Companies With Strong Dividend Yields Suitable For Defensive Investors