Earlier this year, I spent some time dissecting Benjamin Graham's The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a means of valuation when it comes to stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally take the square root. The result, in dollars, is the Graham number.
However, a quick check can help determine whether a company might be worthy of a look using the teachings of Graham. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15 and P/B of 1.5. With that in mind, I looked at the stocks of the S&P 500 that met this ideal situation. Currently, there are 71 companies in the index that meet these criteria. I will be making a CAPScall on these companies after comparing them with competitors and their current value in relation to their Graham numbers. Up next is insurer Assurant (NYS: AIZ) .
What is it?
Assurant is a provider of specialty insurance products, both in the U.S. and select world markets. Among the products it offers is health insurance, but unlike large providers such asAetna, it primarily focuses on customers who are not part of a larger group plan. It's also a one-stop shop for employers in managing employee benefit plans, helping provide long-term and short-term disability coverage, life and dental insurance, and other coverage to employers of various sizes.
Assurant came under fire in New York over collusion with large banks on the fees associated with force-placed homeowner's insurance, or insurance the banks place on a home on which they have a mortgage. Increased premiums were then passed on to the homeowners, and "sweetheart deals" transpired between Assurant and banks such as JPMorgan Chase and Citigroup. With increased focus on this portion of its business, Assurant needs to be mindful that people are paying attention.
What's it worth?
Assurant is nevertheless still the best value among its peer group, trading at a steep discount to its Graham valuation.
Book Value Per Share (MRQ)
StanCorp Financial Group (NYS: SFG)
Triple-S Management (NYS: GTS)
AFLAC (NYS: AFL)
Unum Group (NYS: UNM)
Sources: Yahoo! Finance and author's calculations.
StanCorp Financial has about half the upside of Assurant but still looks like a value currently. It is within 30% of its 52-week low, helping to boost its dividend yield to 2.8%. The company also fosters a community of giving among its employees and retirees, who together donated more than $2.6 million to nonprofits over the past year through its matching gift program. Triple-S Management, the leading managed care company in Puerto Rico, has recovered nicely from a steep decline caused by an earnings miss back in March and could continue to benefit from increased Medicaid and Medicare participation because of the Patient Protection and Affordable Care Act.
AFLAC is probably the most famous name in this sector. Even with a recent downgrade by analysts, its low debt-to-equity ratio and above average dividend yield make it a dividend bargain with plenty of dividend growth potential. Finally, Unum Group may not have as much of an upside as the others on this list, but it is currently near a 52-week low that has helped boost its dividend yield to 2.7%.
A stock's valuation, regardless of the method used, is but one thing to look at when evaluating a potential investment. With a lot of room to grow into its Graham number valuation, I will be placing a "thumbs up" over on my CAPS page to track this call and keep myself accountable. I will also be adding Assurant to My Watchlist to stay up to date on anything that may cause me to change my opinion of the company.
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The article According to Graham, Is This Insurer Cheap? originally appeared on Fool.com.
Fool contributorRobert Eberhardholds no position in any other company mentioned.Follow himon Twitter, or check out hisholdings and a short bio. The Motley Fool owns shares of Citigroup and JPMorganChase.Motley Fool newsletter serviceshave recommended buying shares of AFLAC. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.
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