The truth is that I was reluctant to run my Benjamin Graham Defensive screen, one that I've used for years that is based on his "stocks for the defensive investor", methodology laid out in The Intelligent Investor. Given the dearth of names many of my tried and true deep value screens are revealing these days - in the midst of this ten-year bull market - I figured there would be no results.
That's what happened in my last column on the subject, circa early March. While I reviewed performance of the last group that search revealed, the natural follow-up never happened because there were no companies that qualified. This weekend I decided to give it another shot. With trembling hands (just kidding), I executed the screen which utilizes the following criteria:
- Adequate size. A company must have at least $500 million in sales on a trailing 12-month basis. (Graham used a $100 million minimum and at least $50 million in total assets.)
- Strong financial condition. A firm must have a "current ratio" (current assets divided by current liabilities) of at least 2.0. It must also have less long-term debt less than working capital.
- Earnings stability. A business has to have had positive earnings for the past seven years. (Graham used a 10-year minimum.)
- Dividend record. The company must have paid a dividend for the past seven years. (Graham required 20 years.)
- Earnings growth. Earnings must have expanded by at least 3% compounded annually over the past seven years. (Graham mandated a one-third gain in earnings per share over the latest 10 years.)
- Moderate price-to-earnings ratio. A stock must have had a 15 or lower average P/E over the past three years.
- Moderate ratio of price to assets. The price-to-earnings ratio times the price-to-book ratio must be less than 22.5.
- No utilities or retailers.
Surprisingly, there were two companies that qualified. One, Newell Brands (NWL) , I've written about often recently, and took a position early last month. Still disliked by many besides Carl Icahn, who recently increased his stake in the company from 7.1% to 8.1%, I chuckled when I saw that NWL made the cut as I took a position without that knowledge.
The other qualifier is asset management name Federated Investors (FII) , which has been hammered year-to-date in 2018, down about 37%. A good deal of damage was done following a first quarter earnings disappointment announced on April 26th; shares fell 13% that day.
FII, which is in the top 12 of U.S. mutual fund managers, had $392 billion in assets under management at the end of the second quarter. Shares currently trade at just over 9.5 X next year's consensus earnings estimates, and yield 4.7%. The company increased the regular dividend 8% earlier this year to 27 cents/quarter, after keeping it steady at 25 cents for about 5 years (excluding special dividends paid in 2012 and 2016).
I typically avoid financials simply because I don't understand how they work, but am intrigued enough to dig deeper into FII.