8 High-Yield Utilities Stocks Undervalued by the Graham Number

Many investors buy utilities stocks as a value investment because of their high dividends and generally low volatility relative to the market. Here we present an interesting list of high-dividend utilities that are currently undervalued based on the Graham equation.

Benjamin Graham, the man who developed the equation for the Graham number, was a former mentor of Warren Buffett and is the so-called “Godfather” of value investing.

The Graham Number, or the maximum price an investor should pay for a stock, is derived using only two data points: current earnings per share and current book value per share.??The Graham Number = Fair Value of a Stock = Square Root of (22.5) x (TTM Earnings per Share) x (MRQ Book Value per Share).??

The math of the Graham number is relatively straightforward. It is predicated on the belief that the price-to-earnings (P/EPS) ratio should be no more than 15, and the price-to-book value (P/BVPS) ratio should be no more than 1.5. Therefore we only include companies that meet both of these criteria.

??From these criteria, the product of the two should not be more than 22.5. In other words, (P/EPS of 15) x (P/BVPS of 1.5) = 22.5, from which the equation was created.

We last wrote about this screen on April 8, 2011. On that day, the screen produced 9 companies. Since then, 9 out of 9 companies mentioned in that article have outperformed the S&P 500 index (a success rate of 100.00%). The screen averaged a price-weighted rate of return of 4.9% vs. an index return of 1.1%. ?Click here to access a full breakdown of the screen's past performance.



With past performance in mind, we decided to run the same screen today, and see which companies show up in the update.

We ultimately found 9 high-yield utilities that met all of these requirements to appear undervalued.

Do you think these stocks should be trading higher? Use this list as a starting-off point for your own analysis.

List sorted by potential upside implied by the graham equation.

1. Portland General Electric Company (POR): Electric Utilities Industry. Market cap of $1.92B. Dividend yield at 4.09%. BVPS at $21.80, diluted EPS at $2.22. Graham number = sqrt(22.5 x $21.80 x $2.22) = $33.00. Current price at $25.45 (implies a potential upside of 29.66%). POR appears to have good liquidity to back up its dividend -- current ratio at 1.54 and quick ratio at 1.42. The stock has gained 37.61% over the last year. ??

2. Entergy Corporation (ETR): Electric Utilities Industry. Market cap of $12.33B. Dividend yield at 4.82%. BVPS at $47.87, diluted EPS at $6.95. Graham number = sqrt(22.5 x $47.87 x $6.95) = $86.52. Current price at $68.77 (implies a potential upside of 25.81%). The stock has lost 8.69% over the last year. ??

3. Central Vermont Public Service Corp. (CV): Electric Utilities Industry. Market cap of $306.86M. Dividend yield at 4.02%. BVPS at $20.44, diluted EPS at $1.66. Graham number = sqrt(22.5 x $20.44 x $1.66) = $27.63. Current price at $22.99 (implies a potential upside of 20.18%). The stock has gained 13.65% over the last year. ??

4. American Electric Power Co., Inc. (AEP): Electric Utilities Industry. Market cap of $17.76B. Dividend yield at 4.99%. BVPS at $28.59, diluted EPS at $2.54. Graham number = sqrt(22.5 x $28.59 x $2.54) = $40.42. Current price at $37.60 (implies a potential upside of 7.50%). The stock has gained 15.33% over the last year.

??5. Pinnacle West Capital Corporation (PNW): Electric Utilities Industry. Market cap of $4.91B. Dividend yield at 4.66%. BVPS at $33.31, diluted EPS at $3.12. Graham number = sqrt(22.5 x $33.31 x $3.12) = $48.36. Current price at $45.00 (implies a potential upside of 7.46%). The stock has gained 30.18% over the last year. ??

6. Integrys Energy Group, Inc. (TEG): Gas Utilities Industry. Market cap of $4.17B. Dividend yield at 5.11%. BVPS at $38.55, diluted EPS at $3.75. Graham number = sqrt(22.5 x $38.55 x $3.75) = $57.03. Current price at $53.23 (implies a potential upside of 7.14%). TEG appears to have good liquidity to back up its dividend -- current ratio at 1.36 and quick ratio at 1.29. The stock is a short squeeze candidate, with a short float at 5.16% (equivalent to 8.16 days of average volume).

??7. SCANA Corp. (SCG): Diversified Utilities Industry. Market cap of $5.35B. Dividend yield at 4.64%. BVPS at $29.59, diluted EPS at $2.97. Graham number = sqrt(22.5 x $29.59 x $2.97) = $44.47. Current price at $41.69 (implies a potential upside of 6.66%). The stock has gained 17.56% over the last year.

??8. Consolidated Edison Inc. (ED): Diversified Utilities Industry. Market cap of $15.71B. Dividend yield at 4.47%. BVPS at $38.43, diluted EPS at $3.73. Graham number = sqrt(22.5 x $38.43 x $3.73) = $56.79. Current price at $53.50 (implies a potential upside of 6.15%). ED appears to have good liquidity to back up its dividend -- current ratio at 1.34 and quick ratio at 1.25. The stock has gained 24.2% over the last year.

*BVPS and diluted EPS sourced from Yahoo! Finance, all other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.