Investing 101: Small Cap Dividend Stocks Undervalued by the Graham Number

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To create this list we started with a universe of small cap dividend stocks. We limited the dividend yield to 2-7% as yields any higher can be considered unsustainable.

We took the qualifying names and searched for those most undervalued by the Graham number. We list the top 10 names below.

Interested in exploring the terms used above, as well as their implications? Let's review:

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.

Dividends are a payment made by a company to its shareholders. The money is a portion of the company's profits. Not all companies pay dividends. Management (a company's executives) determine if and when dividends are paid, and how much each shareholder is paid.

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%)

Market capitalization (market cap): Market capitalization, commonly referred to as market cap, is the total market value of a company's outstanding shares. It can be thought of as a measure of company's size. It can be calculated by multiplying the number of shares by the current price of the shares. Companies with higher market cap are considered to have more trustworthy information because they have greater histories of profitability and data. For this list we focus on small cap stocks, meaning market caps between $300M and $2B.

Now that you're armed with knowledge, take a look at the list below. Do you think these names are truly undervalued? Use the data as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)

1. 1st Source (NAS: SRCE) : Regional Banks Industry. Market cap of $517.37M. Dividend yield at 2.99%. TTM diluted EPS at $1.68, MRQ book value per share at $20.88, Graham number at $28.09 (vs. current price at $21.45, implies a potential upside of 30.97%). The stock has had a couple of great days, gaining 6.9% over the last week.

2. Washington Trust Bancorp (NAS: WASH) : Regional Banks Industry. Market cap of $322.02M. Dividend yield at 4.45%. TTM diluted EPS at $1.72, MRQ book value per share at $17.3, Graham number at $25.87 (vs. current price at $19.94, implies a potential upside of 29.76%). The stock has performed poorly over the last month, losing 12.24%.

3. Trustmark (NAS: TRMK) : Regional Banks Industry. Market cap of $1.29B. Dividend yield at 4.58%. TTM diluted EPS at $1.66, MRQ book value per share at $18.6, Graham number at $26.36 (vs. current price at $20.36, implies a potential upside of 29.46%). The stock is a short squeeze candidate, with a short float at 7.73% (equivalent to 13.07 days of average volume). The stock has gained 9.66% over the last year.

4. First Financial Corp. (NAS: THFF) : Regional Banks Industry. Market cap of $381.88M. Dividend yield at 3.24%. TTM diluted EPS at $2.42, MRQ book value per share at $26.06, Graham number at $37.67 (vs. current price at $29.1, implies a potential upside of 29.45%). The stock has performed poorly over the last month, losing 10.48%.

5. TrustCo Bank Corp. NY (NAS: TRST) : Regional Banks Industry. Market cap of $396.82M. Dividend yield at 6.16%. TTM diluted EPS at $0.39, MRQ book value per share at $3.48, Graham number at $5.53 (vs. current price at $4.29, implies a potential upside of 28.81%). The stock has performed poorly over the last month, losing 10.13%.

6. Maiden Holdings (NAS: MHLD) : Property & Casualty Insurance Industry. Market cap of $582.65M. Dividend yield at 3.96%. TTM diluted EPS at $0.45, MRQ book value per share at $10.52, Graham number at $10.32 (vs. current price at $8.06, implies a potential upside of 28.05%). The stock has performed poorly over the last month, losing 12.46%.

7. Thor Industries (NYS: THO) : Recreational Vehicles Industry. Market cap of $1.11B. Dividend yield at 3.02%. TTM diluted EPS at $2.02, MRQ book value per share at $14.41, Graham number at $25.59 (vs. current price at $20.3, implies a potential upside of 26.07%). This is a risky stock that is significantly more volatile than the overall market (beta = 2.02). The stock has performed poorly over the last month, losing 19.96%.

8. BancFirst (NAS: BANF) : Regional Banks Industry. Market cap of $524.33M. Dividend yield at 2.91%. TTM diluted EPS at $2.77, MRQ book value per share at $30.8, Graham number at $43.81 (vs. current price at $34.8, implies a potential upside of 25.9%). The stock has had a couple of great days, gaining 5.37% over the last week. The stock has performed poorly over the last month, losing 10.54%.

9. NBT Bancorp (NAS: NBTB) : Regional Banks Industry. Market cap of $648.96M. Dividend yield at 4.14%. TTM diluted EPS at $1.68, MRQ book value per share at $15.94, Graham number at $24.55 (vs. current price at $19.51, implies a potential upside of 25.82%). The stock has performed poorly over the last month, losing 10.14%.

10. Umpqua Holdings (NAS: UMPQ) : Regional Banks Industry. Market cap of $1.05B. Dividend yield at 2.18%. TTM diluted EPS at $0.41, MRQ book value per share at $14.62, Graham number at $11.61 (vs. current price at $9.29, implies a potential upside of 25.01%). The stock is a short squeeze candidate, with a short float at 6.38% (equivalent to 8.14 days of average volume). The stock has performed poorly over the last month, losing 20.31%.

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.

At the time this article was published The Motley Fool owns shares of BancFirst. 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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