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Value investors search for stocks that appear underpriced relative to their intrinsic value, which is based off of company metrics such as earnings or book value. One helpful way to find undervalued opportunities is from the “godfather of value investing” himself, Benjamin Graham.

Graham created an equation to calculate the maximum fair value for a stock, referred to as the Graham Number. Any stock trading at a significant discount to this number would appear undervalued.

The Graham Number only requires two data points: current earnings per share and current book value per share. 
The Graham Number = Square Root of (22.5) x (TTM Earnings per Share) x (MRQ Book Value per Share). 

This equation assumes that a stock is overvalued if P/E is over 15 or P/BV is over 1.5.

We used the Graham Number to screen for potentially undervalued stocks among the universe of dividend stocks paying yields above 2% and sustainable payout ratios below 35%. We also screened for companies with low debt, with most recent quarter total debt to assets less than 0.2.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.

We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month.

(Click to enlarge)

Do you think these companies are being undervalued? Use this list as a starting-off point for your own analysis.

List sorted by dividend yield.

1. Unitrin Inc. (UTR): Property & Casualty Insurance Industry. Market cap of $1.75B. Dividend yield at 3.32%, payout ratio at 26.0%. MRQ total debt to assets at 0.07. TTM diluted EPS at $3.10, MRQ book value per share at $35.01, implies a Graham number of $49.42 (vs. current price of $28.23, a potential upside of 75.05%). The stock has gained 14.03% over the last year.

2. Northrop Grumman Corporation (NOC): Conglomerates Industry. Market cap of $18.16B. Dividend yield at 3.05%, payout ratio at 27.82%. MRQ total debt to assets at 0.15. TTM diluted EPS at $7.08, MRQ book value per share at $43.33, implies a Graham number of $83.08 (vs. current price of $63.94, a potential upside of 29.94%). The stock is a short squeeze candidate, with a short float at 8.66% (equivalent to 10.8 days of average volume). The stock has gained 31.59% over the last year.

3. Horace Mann Educators Corp. (HMN): Property & Casualty Insurance Industry. Market cap of $598.60M. Dividend yield at 2.93%, payout ratio at 17.56%. MRQ total debt to assets at 0.03. TTM diluted EPS at $2.04, MRQ book value per share at $22.63, implies a Graham number of $32.23 (vs. current price of $15.00, a potential upside of 114.86%). Might be undervalued at current levels, with a PEG ratio at 0.92, and P/FCF ratio at 4.24. It's been a rough couple of days for the stock, losing 5.6% over the last week.

4. Whirlpool Corp. (WHR): Appliances Industry. Market cap of $5.84B. Dividend yield at 2.61%, payout ratio at 19.53%. MRQ total debt to assets at 0.16. TTM diluted EPS at $8.01, MRQ book value per share at $58.78, implies a Graham number of $102.93 (vs. current price of $75.38, a potential upside of 36.54%). It's been a rough couple of days for the stock, losing 6.55% over the last week.

5. American Greetings Corp. (AM-OLD): Business Services Industry. Market cap of $935.41M. Dividend yield at 2.61%, payout ratio at 18.72%. MRQ total debt to assets at 0.15. TTM diluted EPS at $2.15, MRQ book value per share at $19.36, implies a Graham number of $30.60 (vs. current price of $22.89, a potential upside of 33.70%). The stock is a short squeeze candidate, with a short float at 18.38% (equivalent to 23.28 days of average volume). The stock has gained 18.5% over the last year.

6. A. Schulman, Inc. (SHLM): Rubber & Plastics Industry. Market cap of $736.15M. Dividend yield at 2.60%, payout ratio at 25.73%. MRQ total debt to assets at 0.16. TTM diluted EPS at $1.64, MRQ book value per share at $16.61, implies a Graham number of $24.76 (vs. current price of $23.64, a potential upside of 4.73%). It's been a rough couple of days for the stock, losing 6.76% over the last week.

7. BancFirst Corporation (BANF): Regional Industry. Market cap of $596.05M. Dividend yield at 2.58%, payout ratio at 33.87%. MRQ total debt to assets at 0.01. TTM diluted EPS at $2.82, MRQ book value per share at $30.33, implies a Graham number of $43.87 (vs. current price of $38.40, a potential upside of 14.24%). The stock has gained 7.82% over the last year.

*EPS and BVPS sourced from Yahoo! Finance, total debt to assets sourced from Screener.co, all other data sourced from Finviz.

Source: 7 Low-Debt Dividend Stocks Undervalued by Graham Number