One helpful way to find potentially 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 low-debt stocks seeing rapid dividend growth, comparing the current year dividend per share estimate to the trailing-twelve-month dividend per share.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the 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. To access a complete analysis of this list's recent performance, click here.
Do you think these are attractive sources of dividend income? Use this list as a starting-off point for your own analysis.
List sorted by dividend yield.
1. Lowe's Companies Inc. (LOW): Home Improvement Stores Industry. Market cap of $25.40B. Dividend yield at 2.87%, payout ratio at 30.72%. Current year dividend per share estimate at $0.52 vs. TTM dividend per share at $0.44. MRQ total debt to assets at 0.18. TTM diluted EPS at $1.42, MRQ book value per share at $13.25, Graham number at $20.58 (vs. current price at $19.54, implies a potential upside of 5.30%). The stock has performed poorly over the last month, losing 15.06%.
2. First Commonwealth Financial Corp. (FCF): Regional Banks Industry. Market cap of $444.82M. Dividend yield at 2.83%, payout ratio at 23.79%. Current year dividend per share estimate at $0.12 vs. TTM dividend per share at $0.08. MRQ total debt to assets at 0.06. TTM diluted EPS at $0.35, MRQ book value per share at $7.28, Graham number at $7.57 (vs. current price at $4.32, implies a potential upside of 75.27%). The stock is a short squeeze candidate, with a short float at 5.44% (equivalent to 9.26 days of average volume). It's been a rough couple of days for the stock, losing 12.22% over the last week.
3. Fifth Third Bancorp (FITB): Regional Banks Industry. Market cap of $8.78B. Dividend yield at 2.51%, payout ratio at 14.65%. Current year dividend per share estimate at $0.24 vs. TTM dividend per share at $0.14. MRQ total debt to assets at 0.12. TTM diluted EPS at $1.01, MRQ book value per share at $13.24, Graham number at $17.35 (vs. current price at $9.99, implies a potential upside of 73.63%). This is a risky stock that is significantly more volatile than the overall market (beta = 2.23). It's been a rough couple of days for the stock, losing 15.19% over the last week.
4. U.S. Bancorp (USB): Regional Banks Industry. Market cap of $42.09B. Dividend yield at 2.28%, payout ratio at 16.75%. Current year dividend per share estimate at $0.48 vs. TTM dividend per share at $0.35. MRQ total debt to assets at 0.19. TTM diluted EPS at $2.06, MRQ book value per share at $15.50, Graham number at $26.80 (vs. current price at $22.44, implies a potential upside of 19.44%). It's been a rough couple of days for the stock, losing 7.63% over the last week.
5. City National Corp. (CYN): Regional Banks Industry. Market cap of $2.27B. Dividend yield at 1.88%, payout ratio at 20.01%. Current year dividend per share estimate at $0.80 vs. TTM dividend per share at $0.60. MRQ total debt to assets at 0.04. TTM diluted EPS at $3.02, MRQ book value per share at $39.24, Graham number at $51.64 (vs. current price at $43.39, implies a potential upside of 19.01%). It's been a rough couple of days for the stock, losing 12.27% over the last week.
*Dividend per share data sourced from Screener.co, EPS and BVPS data sourced from Yahoo! Finance, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
