Investing 101: 6 Dividend Champions Undervalued by Graham

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Interested in finding undervalued dividend stocks? If so, the following list will likely be of interest to you.

To create the list, we started by compiling a universe of "Dividend Champions," companies with a history of increasing dividends each year for at least the past 25 consecutive years. From there, we searched for the names that appear undervalued according to the Graham number.

Want a closer look at any of these terms? Let's review: 

Dividend yield is the company's annual dividend payment divided by its market cap, or dividend per share. It is presented as a %.

If Company XYZ has shares valued at $100 and pays a $5 dividend, the dividend yield is $5/$100 = 0.05 (5%)

Payout Ratio: It is the amount of earnings paid out to shareholders represented as a percentage. It is calculated as the dividends per share / earnings per share. A low payout indicates a company is keeping its earnings while a high payout ratio indicated the company uses its earnings for dividend purposes. This ratio also gives an investor an idea of how well the company's earnings can support its dividend payments (generally, the higher, the better).

Graham Number: According to Benjamin Graham, a former mentor of Warren Buffett and the so-called "Godfather" of value investing, the Graham number is the maximum price that a value investor should pay for a given stock. A stock whose share price is below the Graham number is considered to be undervalued or of good value.

It is a calculation for the fair-value price of a stock based on its earnings per share (EPS) and book value per share (the value of the company's assets divided by the number of shares).

The Graham Number = Square Root of (22.5) x (TTM EPS) x (MRQ Book Value per Share)

We use the Graham Number to screen for potentially undervalued stocks

Note: The market does not price stocks based on the Graham Number, so share prices could increase significantly above the Graham Number, or fall far below it. This is also just one of many ways to value a stock.

Now that you're armed with knowledge, take a look at the list of Dividend Champions below. Do you think these names are truly undervalued? Use this as a starting point for your own analysis.

Data sorted by potential upside to the Graham number. (Click here to access free, interactive tools to analyze these ideas)

1. Community Trust Bancorp (NAS: CTBI) : Regional Banks Industry. Market cap of $397.68M. Dividend yield at 4.9%, payout ratio at 52%. TTM diluted EPS at $2.34, MRQ book value per share at $23.01, implies a Graham number of $34.81 (vs. current price of $25.55, a potential upside of 36.23%). The stock has had a couple of great days, gaining 5.27% over the last week.

2. Cincinnati Financial (NAS: CINF) : Property & Casualty Insurance Industry. Market cap of $4.32B. Dividend yield at 6.3%, payout ratio at 88%. TTM diluted EPS at $1.81, MRQ book value per share at $31.03, implies a Graham number of $35.55 (vs. current price of $26.4, a potential upside of 34.65%). The stock is a short squeeze candidate, with a short float at 6.23% (equivalent to 6.24 days of average volume). The stock has had a couple of great days, gaining 9.98% over the last week.

3. AT&T (NYS: T) : Telecom Services Industry. Market cap of $170.73B. Dividend yield at 6.1%, payout ratio at 50%. TTM diluted EPS at $3.44, MRQ book value per share at $19.21, implies a Graham number of $38.56 (vs. current price of $28.72, a potential upside of 34.26%). The stock has gained 14.42% over the last year.

4. AFLAC (NYS: AFL) : Accident & Health Insurance Industry. Market cap of $17.78B. Dividend yield at 3.2%, payout ratio at 31%. TTM diluted EPS at $3.8, MRQ book value per share at $25.65, implies a Graham number of $46.83 (vs. current price of $37.58, a potential upside of 24.61%). Might be undervalued at current levels, with a PEG ratio at 0.83, and P/FCF ratio at 2.28. The stock has performed poorly over the last month, losing 15.43%.

5. Black Hills (NYS: BKH) : Electric Utilities Industry. Market cap of $1.18B. Dividend yield at 5%, payout ratio at 71%. TTM diluted EPS at $2.05, MRQ book value per share at $28.1, implies a Graham number of $36 (vs. current price of $29.39, a potential upside of 22.5%). The stock is a short squeeze candidate, with a short float at 18.59% (equivalent to 19.23 days of average volume). The stock has had a couple of great days, gaining 12.89% over the last week.

6. CenturyLink (NYS: CTL) : Telecom Services Industry. Market cap of $21.56B. Dividend yield at 8.4%, payout ratio at 123%. TTM diluted EPS at $2.03, MRQ book value per share at $35.97, implies a Graham number of $40.53 (vs. current price of $34.4, a potential upside of 17.83%). The stock has had a couple of great days, gaining 9.93% over the last week.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Becca Lipman does not own any of the shares mentioned above. Dividend data sourced from Yahoo! Finance. All other data sourced from Finviz.

At the time this article was published The Motley Fool owns shares of AFLAC. Motley Fool newsletter services have recommended buying shares of AT&T and AFLAC. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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