Many investors turn to Benjamin Graham's so-called “Graham number” to calculate the fair price of a stock. The Graham number is √(22.5 * earnings per share * book value per share), which for Dana gives us a fair price of $18.12. And today, the company is trading only a few cents higher, at $18.45.
The Graham number is often used in isolation, but in fact it is only one part of a check list for choosing defensive stocks that he laid out in Chapter 14 of The Intelligent Investor. The analysis requires us to look at the following fundamentals of Dana to determine if it truly is a safe stock pick.
Sales Revenue Should Be No Less Than $500 million
For Dana, average sales revenue over the last 5 years has been $7,871,200,000, so in the context of the Graham analysis the stock has impressive sales revenue. Originally the threshold was $100 million, but since the book was published in the 1970s it's necessary to adjust the figure for inflation.
Current Assets Should Be at Least Twice Current Liabilities
We calculate Dana's current ratio by dividing its total current assets of $3,586,000,000 by its total current liabilities of $2,174,000,000. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. Dana’s current assets outweigh its current liabilities by a factor of 1.65 only.
The Company’s Long-term Debt Should Not Exceed its Net Current Assets
This means that its ratio of debt to net current assets should be 1 or less. Since Dana’s debt ratio is 1.66, the company has too much debt. We calculate Dana’s debt to net current assets ratio by dividing its total long term of debt of $2,346,000,000 by its current assets minus total current liabilities.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years
Dana had negative retained earnings in 2012, 2013, and 2014 with an average of $-141,615,385. Retained earnings are the sum of the current and previous reporting periods' net asset amounts, minus all dividend payments. It's a similar metric to free cash flow, with the difference that retained earnings are accounted for on an accrual basis.
There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years
Shareholders of Dana have received regular dividends since 2012. The company has returned a 2.13% dividend yield over the last 12 months.
A Minimum Increase of at Least One-third in Earnings per Share (EPS) Over the Past 10 Years
To determine Dana's EPS growth over time, we will average out its EPS for 2009, 2010, and 2011, which were $-4.19, $-0.14, and $1.02 respectively. This gives us an average of $-1.10 for the period of 2009 to 2011. Next, we compare this value with the average EPS reported in 2020, 2021, and 2022, which were $0.27, $1.35, and $-1.69, for an average of $-0.02. Now we see that Dana's EPS growth was 98.18% during this period, which satisfies Ben Graham's requirement.
Dana does not have the profile of a defensive stock according to Benjamin Graham's criteria because although it trades around its fair value, has impressive sales, growing earnings, and a regular dividend, it has:
- insufficient current assets compared to its current liabilities
- too much debt
- a history negative retained earnings