Schlumberger is currently trading at $55.23 per share and has a Graham number of $26.04, which implies that it is 112.12% above its fair value. We calculate the Graham number as follows:
√(22.5 * 5 year average earnings per share * book value per share) = √(22.5 * -1.91 * 12.45) = 26.04
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 Schlumberger, average sales revenue over the last 5 years has been $27,600,600,000, 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 Schlumberger's current ratio by dividing its total current assets of $15,003,000,000 by its total current liabilities of $12,018,000,000. 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. Schlumberger’s current assets outweigh its current liabilities by a factor of 1.25 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 Schlumberger’s debt ratio is 1.21, the company has too much debt. We calculate Schlumberger’s debt to net current assets ratio by dividing its total long term of debt of $3,600,000,000 by its current assets minus total current liabilities.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years
Schlumberger had positive retained earnings from 2008 to 2022 with an average of $26,269,400,000. 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
Schlumberger has offered a regular dividend since at least 2007. The company has returned a 1.82% 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
We are going to compare Schlumberger's earnings per share averages from the two 'bookends' of the 16 year period for which we have data. The first bookend comprises the years 2007, 2008, and 2009, whose EPS values of $4.20, $4.45, and $2.59 average out to $3.75. Next we look at the years 2020, 2021, and 2022, whose values of $-7.57, $1.32, and $2.39 average out to $-1.29. The growth rate between the two averages does not meet Graham's standard since it is -134.4%.
Although it has a record of positive earnings and dividends, Schlumberger does not have the profile of a defensive stock according to Benjamin Graham's criteria because in addition to trading far above its fair value, it has:
- an average current ratio
- too much debt
- decreasing earnings per share