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Known as the father of value investment, Benjamin Graham was an economist and a professional investor. Warren Buffett states that Graham is the second most influential person in his life after his father. Benjamin Graham is famous for his simple yet powerful estimation rules. In his famous book, Intelligent Investor (1973), Graham describes his valuation method as such:

Long Term Valuation = EPS x (8.5 + 2 x Estimated Earnings Growth)

While this formula gives practical information on the stock rankings, it does not account for interest rates or inflation. Realizing this limitation, in Renaissance of Value, Benjamin Graham updates his formula using the corporate bond yields:

Value = EPS x (8.5 + 2 x Estimated Earnings Growth) x (4.4 / AAA Corporate Bond Yield)

Note that this is a long-term valuation. It does not imply any target price estimate. Moreover, according to this valuation, companies that are currently loss-making are worth zero. However, the formula can still be used to calculate the margin of safety in the long run.

The percentage difference between the valuation price and current price gives us the margin of safety.

Margin of Safety = (Intrinsic Value – Price) / Valuation

Graham suggested choosing the undervalued stocks with the highest margin of safety. Warren Buffett explains the margin of safety as paying $70 for a stock with intrinsic value of $100. Graham is a value investor, and he also suggested choosing dividend stocks with positive earnings, strong balance sheets and reasonable P/E ratios. Therefore, I screened for the telecommunication companies that pay at least some dividends, reported positive earnings, have a P/E ratio lower than 20. Stock market data is retrieved from Finviz, and/or Zacks Investment Research, and corporate bond data is retrieved from the Federal Reserve Bank of St. Louis.

Company

Yield

EPS

EPS Growth

Price

Intrinsic

Value

Safety Margin

Vimpel (NASDAQ:VIP)

5.54%

1.49

25.85%

13.71

75.35

81.80%

Millicom International (MICC)

1.40%

15.11

14.58%

88.31

478.00

81.52%

Vivo Participacoes (NYSE:VIV)

2.97%

2.85

33.27%

35.67

179.65

80.14%

Tata Communications (NYSE:TCL)

1.98%

1.18

10.00%

9.37

28.25

66.83%

InterDigital (NASDAQ:IDCC)

0.95%

3.42

17.50%

42.01

124.97

66.38%

BT Group (NYSE:BT)

3.63%

2.46

13.45%

28.96

73.15

60.41%

Cellcom Israel (NYSE:CEL)

11.41%

3.49

9.05%

31.47

77.98

59.64%

Siemens AG (SI)

2.89%

6.68

21.47%

127.59

288.64

55.80%

Telefonica (NYSE:TEF)

7.00%

3.13

5.90%

24.57

53.37

53.97%

City Telecom HK (CTEL)

3.65%

0.76

19.00%

14.09

29.69

52.54%

AT&T (NYSE:T)

6.16%

3.22

6.16%

27.94

56.31

50.39%

France Telecom (FTE)

8.21%

1.98

8.50%

21.29

42.41

49.80%

Rogers Com. (NYSE:RCI)

4.19%

2.73

10.23%

34.21

66.41

48.49%

Telecom New Zealand (NZT)

9.65%

0.58

9.40%

7.36

13.30

44.66%

Partner Com. (NASDAQ:PTNR)

11.71%

2.23

4.50%

18.2

32.78

44.48%

Telekom Indonesia (NYSE:TLK)

0.76%

2.54

8.70%

31.06

55.26

43.79%

NTELOS Holdings (NASDAQ:NTLS)

6.14%

1.07

13.00%

18.24

31.01

41.18%

America Movil (NYSE:AMX)

1.33%

3.76

10.11%

53.63

90.71

40.88%

Nippon T & T (NYSE:NTT)

2.76%

2.42

5.00%

22.47

37.61

40.25%

Mahanagar Tele (NYSE:MTE)

2.21%

0.45

0.00%

1.92

3.21

40.24%

Hickory Tech (HTCO)

5.83%

0.91

5.80%

9.26

15.36

39.73%

SK Telecom (NYSE:SKM)

4.39%

2.06

3.00%

17.81

25.09

29.02%

TELUS Corp (NYSE:TU)

4.62%

3.07

6.55%

46.68

55.70

16.20%

China Mobile (NYSE:CHL)

4.11%

4.4

2.30%

45.02

48.42

7.02%

Turkcell (NYSE:TKC)

4.25%

1.33

2.00%

14.36

13.97

-2.83%

Atlantic Tele-Network (NASDAQ:ATNI)

2.60%

2.49

3.00%

33.87

30.33

-11.8%

BCE (NYSE:BCE)

5.65%

2.43

3.28%

35.88

30.74

-16.7%

Vodafone Group (NASDAQ:VOD)

4.78%

3.45

-0.35%

27.76

22.60

-22.8%

TELESP Sao Paulo (NYSE:TSP)

0.94%

2.85

-0.10%

25

19.87

-25.8%

CenturyLink (NYSE:NTL)

6.93%

3.13

1.82%

41.83

31.92

-31.0%

Consolidated Com. (NASDAQ:CNSL)

8.60%

1.09

1.50%

18.01

10.53

-71.0%

Portugal Telecom (NYSE:PT)

6.13%

0.58

1.90%

11.53

5.99

-92.4%

Windstream (NASDAQ:WIN)

7.73%

0.66

0.18%

12.93

4.91

-163%

Average

4.88%

22.96%

No analyst estimates were available on USA Mobility (NASDAQ:USMO), Telular (NASDAQ:WRLS), and Warwick Valley (WWVY). Therefore, they are excluded from the analysis due to lack of reliable data.

The average, yield of telecommunication companies is 4.88 with a margin of safety around 23%. Two European companies, Vimpel (Netherlands) and Milicom (Luxemburg) rank first and second, followed by two emerging market players; Viva (Brazil) and Tata (India). Based on the formula above, AT&T also has a wide margin of safety with a dividend yield of 6.16%. Dividend investors might consider two Israeli companies, Cellcom Israel, and Partner Communications, as well. Last year, these companies paid double digit dividend yields to the shareholders.

There is one U.S.-based company that requires particular attention. Interdigital is an extremely- fast growing company with a strong balance sheet. The current assets stand at $620 million whereas current liabilities are only $178 million. The long-run performance of Interdigital stocks is outstanding. Stock prices more than quadrupled in the last decade. While the share prices experienced extreme volatility, and lost almost 50% of its value recently, the fundamentals look strong. One might want to keep an eye on that company.

Disclaimer: The formula (and application of the formula) is used for illustrative purposes. Analyst estimations might have large errors especially for stocks with limited analysis. The data might not be reliable, as well. In the short run, stock prices behave according to "Random Walk" theory. If you believe in different growth expectations, use your estimations. These stocks are used as illustrative examples. Everyone should consider their growth expectations and invest accordingly. Feel free to make your assumptions about earnings & future growth and estimate a fair-value figure based on the assumptions using the technique outlined above. An alternative approach based on discounted future earnings with an application to technology stocks can be found here.

Source: 33 Telecommunication Stocks With the Highest Margins of Safety