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Do you prefer stocks that pay part of their return in dividend income? For a closer look at dividend stocks that may be undervalued, we ran a screen.

We began by screening for stocks paying big dividend yields above 4% and sustainable payout ratios below 50%.

We then screened for those with strong profitability compared to industry peers, with higher gross, operating, and pretax margins than their industry averages by at least 5% on each margin. This indicates that these companies are taking a greater percentage of their revenues as profits, and they also have stronger control over their cost structures.

Finally, we screened for those that also 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 off of 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.

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

Tool provided by Kapitall.

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

List sorted by potential upside implied by the Graham Number.

1. Citizens & Northern Corp. (NASDAQ:CZNC): Operates as the holding for Citizens & Northern Bank, which provides various banking and mortgage products and services to individual and corporate customers in north central Pennsylvania and southern New York. Market cap at $232.06M, most recent closing price at $18.99. Dividend yield at 4.21%, payout ratio at 32.74%. TTM gross margin at 84.5% vs. industry average at 73.28%. TTM operating margin at 51.41% vs. industry average at 39.5%. TTM pretax margin at 42.37% vs. industry average at 24.18%. Diluted TTM earnings per share at 1.92, and a MRQ book value per share value at 14.05, implies a Graham Number fair value = sqrt(22.5*1.92*14.05) = $24.64. Based on the stock's price at $18.99, this implies a potential upside of 29.73% from current levels.

2. American National Bankshares Inc. (NASDAQ:AMNB): Operates as the bank holding company for American National Bank and Trust Company that provides various commercial, mortgage, and consumer banking products and services to individuals and businesses in Virginia and North Carolina. Market cap at $175.78M, most recent closing price at $22.45. Dividend yield at 4.10%, payout ratio at 49.10%. TTM gross margin at 81.23% vs. industry average at 73.28%. TTM operating margin at 45.14% vs. industry average at 39.5%. TTM pretax margin at 29.78% vs. industry average at 24.18%. Diluted TTM earnings per share at 1.87, and a MRQ book value per share value at 19.8, implies a Graham Number fair value = sqrt(22.5*1.87*19.8) = $28.86. Based on the stock's price at $22.45, this implies a potential upside of 28.57% from current levels.

3. Public Service Enterprise Group Inc. (NYSE:PEG): Operates in the energy industry primarily in the northeastern and mid Atlantic United States. Market cap at $16.15B, most recent closing price at $31.93. Dividend yield at 4.45%, payout ratio at 48.61%. TTM gross margin at 36.12% vs. industry average at 28.46%. TTM operating margin at 27.% vs. industry average at 18.91%. TTM pretax margin at 21.15% vs. industry average at 12.41%. Diluted TTM earnings per share at 2.89, and a MRQ book value per share value at 21, implies a Graham Number fair value = sqrt(22.5*2.89*21) = $36.95. Based on the stock's price at $31.93, this implies a potential upside of 15.73% from current levels.

*Accounting data sourced from Google Finance, profitability data sourced from Fidelity, all other data sourced from Finviz.

Source: 3 Highly Profitable High Dividend Yield Stocks Undervalued By The Graham Number