Dividend Champions Smackdown XIII - Seeking Alpha

Dividend Champions Smackdown XIII - Seeking Alpha

In previous installments of the Smackdown series, I screened the Dividend Champions list of companies that have paid higher dividends for at least 25 straight years (which can be found here. ) using factors such as yield, payout ratio, and, most recently, the Price/Sales ratio. This time, I decided to start with the newest column, the Premium or Discount to the Graham Number, which can be located in column T. This is a basic measure of "fair value" that was developed by Benjamin Graham, the "father of value investing."

The Graham Number is a relatively simple calculation, in that it involves use of a company's Earnings Per Share and its Book Value Per Share (or BVPS). Since Graham felt that 15 was a reasonable Price/Earnings ratio and that 1.5 was a reasonable Price/Book Value ratio, those numbers are multiplied against the EPS and BVPS and the square root of the product is considered the most an investor should pay for a particular stock. The actual formula is shown as:

Square Root of (22.5 times EPS times BVPS). The 22.5 is simply 15 times 1.5. Although the Graham Number is described as a simple measure of "fair value," it's important not to confuse it with various "Fair Value" Calculations – note the capital letters – that involve a discounted cash flow model and the use of future growth estimates. Graham preferred to use an average of the last three years of earnings and tangible book value – which excludes things like Goodwill – but the Dividend Champions spreadsheet already includes trailing twelve months earnings and the Price/Book Value ratio, which can be utilized for producing the Graham Number. I've taken the process one step further by dividing the current price by the Graham Number to produce a Premium or Discount (in percentage terms) to that number. So I screened as follows:

Step 1: Sort the companies by Premium or Discount to the Graham Number (column T), from low to high. There were only 10 Champions trading at a Discount to the Graham Number and I eliminated one(CenturyLink (CTL)) that had not raised its dividend in more than a year.

Step 2: Eliminate companies with yields and latest increase percentages below 2%. The first step eliminated Archer-Daniels-Midland (ADM),RLI Corp. (RLI), and NACCO Industries (NC) and the second eliminated Community Trust Bancorp (CTBI), Consolidated Edison (ED), and Cincinnati Financial (CINF). This left only three companies.

Step 3: Compare the remaining companies' estimated earnings per share for this year and next year. I wanted to make sure that earnings growth was expected to be healthy enough to support future dividend increases and wanted to eliminate companies whose earnings are expected to decrease. But all three of the remaining candidates are expected to experience declining earnings, so their Graham Numbers should deteriorate, making them less attractive. See below:

(Note that I've sorted all tables back into alphabetical order)

		No.	4/29		LY%	+/-% vs.	TTM	TY Est	NY Est
Company	Symbol	Yrs	Price	Yield	Inc.	Graham	EPS	EPS	EPS
AT&T Inc.	T	27	31.12	5.53	2.38	(17.2)	3.35	2.36	2.53
Chubb Corp.	CB	46	65.19	2.39	5.41	(27.1)	6.76	5.73	5.82
Universal Corp.	UVV	40	43.38	4.43	2.13	(38.2)	5.35	4.60	3.05

Conclusion

This screen produced three companies with relatively poor earnings projections. They have yields ranging from 2.39% to 5.53%, but the companies eliminated in Step 2 might actually be better candidates if an investor can accept a lower yield or low rate of increase. Although these stocks have been strong enough to have increased their dividends for at least 25 straight years, it appears that the Discount to the Graham Number may be the result of particular weakness in expected growth. There may be better candidates among the Contenders and Challengers below.

Bonus Smackdown: The Contenders and the Challengers

I performed the same steps on the Dividend Contenders (increases of 10-24 years) and the Challengers (5-9 years) and the "winners" were:

Contenders:

		No.	4/29		LY%	+/-% vs.	TTM	TY Est	NY Est
Company	Symbol	Yrs	Price	Yield	Inc.	Graham	EPS	EPS	EPS
BancFirst Corp. OK	BANF	17	40.27	2.48	8.70	(7.4)	2.82	2.98	3.25
Community Bank System	CBU	17	25.02	3.84	9.09	(10.2)	1.89	1.98	2.07
ConocoPhillips	COP	11	78.89	3.35	20.00	(13.7)	7.62	8.12	8.85
General Dynamics	GD	20	72.82	2.58	11.90	(2.5)	6.81	7.14	7.66
Harleysville Group	HGIC	24	32.08	4.49	10.77	(18.8)	2.42	2.58	3.08
National Bankshares	NKSH	11	28.43	3.31	6.82	(10.0)	2.28	2.35	2.40
Orrstown Financial Svcs	ORRF	11	27.24	3.38	2.22	(14.2)	2.17	2.55	2.83
SCANA Corp.	SCG	11	41.52	4.67	2.11	(6.2)	2.98	3.06	3.19
StanCorp Financial Group	SFG	13	43.10	2.00	7.50	(29.9)	4.02	4.29	5.23

Challengers:

		No.	4/29		%	+/-% vs.	TTM	TY Est	NY Est
Company	Symbol	Yrs	Price	Yield	Inc.	Graham	EPS	EPS	EPS
Avista Corp.	AVA	9	24.35	4.52	10.00	(9.8)	1.65	1.74	1.85
BOK Financial Corp.	BOKF	7	53.78	2.05	10.00	(1.7)	3.61	3.85	4.18
Duke Energy Corp.	DUK	6	18.65	5.25	2.08	(4.5)	1.00	1.35	1.39
Eagle Financial Services	EFSI	7	16.50	4.36	5.88	(19.9)	1.11	1.65	2.10
Hanover Insurance Grp	THG	7	42.22	2.61	10.00	(34.3)	3.35	3.54	3.61
L-3 Communications	LLL	8	80.19	2.24	12.50	(25.3)	8.25	8.53	8.94
PennantPark Invest. Cp	PNNT	5	12.34	8.75	3.85	(23.5)	1.04	1.19	1.23
Raytheon Company	RTN	7	48.55	3.54	14.67	(9.8)	4.80	4.98	5.58
Xcel Energy	XEL	7	24.33	4.15	3.06	(1.6)	1.62	1.73	1.83

There is a wide range of yields among the Contenders and Challengers, which offer a number of "younger" dividend increasers. Keep in mind that growth estimates are subject to change, as are other numbers. Whatever industries the reader is interested in adding to his or her portfolio, there seem to be some good candidates. As always, please consider this no more than a starting point for more in-depth research.

Disclosure: I am long CTL, T, SCG, DUK, RTN.