Following the standards below an intelligent investor will make sure he obtains a minimum of quality in terms of the earnings, assets , past performance, and the current financial position. From the Intelligent Investor by Benjamin Graham, chapter 14 examines “Stock Selection for the Defensive Investor” and summarizes some key parameters of equity valuation screens.
1) A dividend record paid consecutively for 20 years or longer.
2) No net losses in earnings over the course of a 10-year period
3) A moderate price to earnings ratio that does not exceed more than 15x average earnings for the past three year period.
4) At least an increase of 33% in earnings per share over the last 10-year period, using 3 year averages for the first three and last three years.
5) Adequate size of the company, no less than 100M in sales or 50M in assets for utilities. Another approach Graham suggests is only including top 33%+ percentile in sales size within the given industry.
6) The company should have strong financial condition. Current ratios twice that of current liabilities or a current ratio of 2:1. Also long-term debt should not exceed working capital and finally for utilities debt should not exceed two times the book value.
7) The market price should not exceed 1.5x book value and a Price to B/V ratio multiplied by the P/E should not exceed 22.5. Graham suggests 22.5 due to a 15x P/E multiplier & a 1.5x B/V ratio.
By following the parameters proposed by Benjamin Graham you will ensure you have a portfolio with an average P/E ratio of 13x or less. The result provides what graham calls a “factor of safety” in regards to the known price that must be paid for the future earnings growth.
In this post I go through the parameters above with one variation using 25+ years of consecutive dividend payments. Initially narrowed from a field of 15 I find a few prospects worth further research, one of which was Exxon Mobile and another Aflac Inc.