Bank of America is currently trading at $34.52 per share and has a Graham number of $43.60, which implies that it is trading below its fair value. We calculate the Graham number as follows:
√(22.5 * earnings per share * book value per share) = √(22.5 * 3.19 * 30.61) = 43.6
The Graham number is one of seven factors that Graham enumerates in Chapter 14 of The Intelligent Investor for determining whether a stock offers a margin of safety. Rather than use the Graham number by itself, its best to consider it alongside the following fundamental metrics:
Sales Revenue Should Be No Less Than $500 million
For Bank of America, average sales revenue over the last 5 years has been $88,806,200,000, 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 Bank of America's current ratio by dividing its total current assets of $363,856,000,000 by its total current liabilities of $23,753,000,000. 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. In Bank of America’s case, current assets outweigh current liabilities by a factor of 15.32.
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 Bank of America’s debt ratio is 0.82, the company has healthy debt levels. We calculate Bank of America’s debt to net current assets ratio by dividing its total long term of debt of $280,117,000,000 by its current assets minus total current liabilities.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years
Bank of America had positive retained earnings from 2008 to 2021 with an average of $101,380,357,143. 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 Bank of America have received regular dividends since 2010. The company has returned a 2.55% 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 Bank of America's EPS growth over time, we will average out its EPS for 2007, 2008, and 2009, which were $3.29, $0.54, and $-0.29 respectively. This gives us an average of $1.18 for the period of 2007 to 2009. Next, we compare this value with the average EPS reported in 2019, 2020, and 2021, which were $2.75, $1.87, and $3.57, for an average of $2.73. Now we see that Bank of America's EPS growth was 131.36% during this period, which satisfies Ben Graham's requirement.
Bank of America meets most of Benjamin Graham's criteria for an undervalued stock because in addition to trading around its fair value, it has:
- impressive sales revenue
- an excellent current ratio
- healthy debt levels
- positive retained earnings from 2008 to 2021
- a solid record of dividends
- EPS growth in excess of Graham's requirements