Graham’s Defensive Stock Criteria:
1. Graham wanted companies that were not too small for the defensive type person and suggested companies that had not less than $100 million of annual sales ($50 million for a public utility). Today, that number would probably best be translated to at least $300 million in today’s dollars.
2. A current ratio of at least 2-1. The current ratio is the ratio produced by taking current assets and dividing them by current liabilities.
3. Long–term debt should be equal to or less than net current assets or basically, long-term debt less than working capital.
4. Earnings stability, meaning that there should be positive earnings for each of the last 10 consecutive years.
5. Twenty years of dividend payment. This becomes more difficult today, because of the vast number of companies reinvesting large portions of their earnings back into the company. Today we would be happy to find companies with a dividend history of 7-10 years.
6. Earnings growth of approximately 30-33% over a 10 year period or approximately 3% per year. If you read carefully, Graham did not take the first and last year to discover his average. He would take the first 3 years and get an average, the last 3 years and get an average and then base his 10-year earnings growth on those two numbers. I will be using five-year rates.
7. The price/earnings ratio should not be more than 15 over the past three years.
8. Finally, he suggested that the price to book value not exceed 1.5; however, he allowed for a slight alteration if multiplying the P/B times the P/E did not produce a product greater than 22.5. Therefore, as an example, this would allow a P/B of 2 and a P/E of 9, resulting in a slightly higher P/B, but allowed under this method.
Copel Companhia Paranaense De Energia (ELP, Financial) (ADR)
Sales: $5344
Current Ratio: 2.06
LTD: Less than working capital
Earnings Stability: 10 years of positive earnings
Dividends: 7 years minimum with 0.7% yield
Earnings Growth: 10% per year (5 years)
P/E: 11.5
P/B: 1.0
P/E x P/B: 11.5
Stepan Co. (SCL, Financial)
Sales: $1517
Current Ratio: 1.9 (missed required 2.0)
LTD: Less than working capital
Earnings Stability: 10 years of positive earnings
Dividends: 10 years minimum with 1.56% yield
Earnings Growth: 35% per year (5 years)
P/E: 10.7
P/B: 1.8
P/E x P/B: 19.26
Almost Family Inc. (AFAM, Financial)
Misses 100% pass by 1 of the 8 criteria
Sales: $338
Current Ratio: 3.7
LTD: Less than working capital
Earnings Stability: 10 years of positive earnings
Dividends: Does not pay dividends though to their favor, they have repurchased shares and are earning 23% on the earnings they have kept.
Earnings Growth: 42.6% per year (5 years)
P/E: 8.5
P/B: 1.36
P/E x P/B: 11.56
Cisco (CSCO, Financial)
Sales: $42859
Current Ratio: 3.4
LTD: Less than working capital
Earnings Stability: 9 years of positive earnings
Dividends: Does not pay dividends though to their favor, they have repurchased shares and are earning 18% on the earnings they have kept.
Earnings Growth: 9.76% per year (5 years)
P/E: 10.57
P/B: 1.77
P/E x P/B: 18.72
1. Graham wanted companies that were not too small for the defensive type person and suggested companies that had not less than $100 million of annual sales ($50 million for a public utility). Today, that number would probably best be translated to at least $300 million in today’s dollars.
2. A current ratio of at least 2-1. The current ratio is the ratio produced by taking current assets and dividing them by current liabilities.
3. Long–term debt should be equal to or less than net current assets or basically, long-term debt less than working capital.
4. Earnings stability, meaning that there should be positive earnings for each of the last 10 consecutive years.
5. Twenty years of dividend payment. This becomes more difficult today, because of the vast number of companies reinvesting large portions of their earnings back into the company. Today we would be happy to find companies with a dividend history of 7-10 years.
6. Earnings growth of approximately 30-33% over a 10 year period or approximately 3% per year. If you read carefully, Graham did not take the first and last year to discover his average. He would take the first 3 years and get an average, the last 3 years and get an average and then base his 10-year earnings growth on those two numbers. I will be using five-year rates.
7. The price/earnings ratio should not be more than 15 over the past three years.
8. Finally, he suggested that the price to book value not exceed 1.5; however, he allowed for a slight alteration if multiplying the P/B times the P/E did not produce a product greater than 22.5. Therefore, as an example, this would allow a P/B of 2 and a P/E of 9, resulting in a slightly higher P/B, but allowed under this method.
Copel Companhia Paranaense De Energia (ELP, Financial) (ADR)
Sales: $5344
Current Ratio: 2.06
LTD: Less than working capital
Earnings Stability: 10 years of positive earnings
Dividends: 7 years minimum with 0.7% yield
Earnings Growth: 10% per year (5 years)
P/E: 11.5
P/B: 1.0
P/E x P/B: 11.5
Stepan Co. (SCL, Financial)
Sales: $1517
Current Ratio: 1.9 (missed required 2.0)
LTD: Less than working capital
Earnings Stability: 10 years of positive earnings
Dividends: 10 years minimum with 1.56% yield
Earnings Growth: 35% per year (5 years)
P/E: 10.7
P/B: 1.8
P/E x P/B: 19.26
Almost Family Inc. (AFAM, Financial)
Misses 100% pass by 1 of the 8 criteria
Sales: $338
Current Ratio: 3.7
LTD: Less than working capital
Earnings Stability: 10 years of positive earnings
Dividends: Does not pay dividends though to their favor, they have repurchased shares and are earning 23% on the earnings they have kept.
Earnings Growth: 42.6% per year (5 years)
P/E: 8.5
P/B: 1.36
P/E x P/B: 11.56
Cisco (CSCO, Financial)
Sales: $42859
Current Ratio: 3.4
LTD: Less than working capital
Earnings Stability: 9 years of positive earnings
Dividends: Does not pay dividends though to their favor, they have repurchased shares and are earning 18% on the earnings they have kept.
Earnings Growth: 9.76% per year (5 years)
P/E: 10.57
P/B: 1.77
P/E x P/B: 18.72
