3 Highly Liquid Dividend Stocks Undervalued By The Graham Number

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Includes: CASC-OLD, FF, MKSI
by: Kapitall

Looking to add some dividend income to your portfolio? For a closer look at some interesting dividend stocks, we ran a screen.

We began by screening for dividend stocks with strong liquidity: stocks that pay dividend yields above 2%, sustainable payout ratios below 50%, and current ratios above 3. The current ratio is current assets/current liabilities, so ratios above 3 indicate the company has at least 3 times the liquid assets to cover their short-term liabilities.

Stocks with higher company liquidity are thought to pay more sustainable dividends.

We then 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.

Interactive Chart: Press Play to compare changes in market cap 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 stocks pay reliable dividends? Use this list as a starting point for your own analysis.

List sorted by potential upside implied by the Graham Number.

1. Cascade Corp. (NYSE:CASC-OLD): Manufactures loading devices and replacement parts primarily for the lift-truck and construction industry. Market cap at $512.91M, most recent closing price at $47.33. Dividend yield at 3.03%, payout ratio at 15.80%. Current ratio at 3.75. Diluted TTM earnings per share at 5.58, and a MRQ book value per share value at 28.02, implies a Graham Number fair value = sqrt(22.5*5.58*28.02) = $59.31. Based on the stock's price at $46.25, this implies a potential upside of 28.24% from current levels.

2. FutureFuel Corp. (NYSE:FF): Engages in the manufacture and sale of specialty chemicals and bio-based products primarily in the United States. Market cap at $397.5M, most recent closing price at $9.70. Dividend yield at 4.16%, payout ratio at 47.10%. Current ratio at 6.77. Diluted TTM earnings per share at 0.84, and a MRQ book value per share value at 6.98, implies a Graham Number fair value = sqrt(22.5*0.84*6.98) = $11.49. Based on the stock's price at $9.62, this implies a potential upside of 19.39% from current levels.

3. MKS Instruments Inc. (NASDAQ:MKSI): Provides instruments, subsystems, and process control solutions that measure, control, power, monitor, and analyze parameters of manufacturing processes worldwide. Market cap at $1.38B, most recent closing price at $26.46. Dividend yield at 2.28%, payout ratio at 27.50%. Current ratio at 10.11. Diluted TTM earnings per share at 2.15, and a MRQ book value per share value at 19.16, implies a Graham Number fair value = sqrt(22.5*2.15*19.16) = $30.44. Based on the stock's price at $26.26, this implies a potential upside of 15.93% from current levels.

*BVPS and EPS 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.