The Graham Number is part of Benjamin Graham’s stock screen for dividend investors. It uses price in relation to earnings and book value to identify the relative valuations of stable dividend stocks.
In The Intelligent Investor (amazon link) , Benjamin Graham delineates between two types of investors:
1. The Defensive Investor (Chapters 4, 5, & 14)
2. The Enterprising Investor (Chapters 6, 7, & 15)
The Graham Number pertains to the defensive investor. The defensive investor is a dividend investor looking for adequate long term returns through conservative investments.
Graham provided a check list of 7 criterion for the defensive investor to apply in searching for acceptable stocks. The Graham number is a great substitute for #6, and #7 on his list.
Graham’s Quality and Quantity Criteria
1. Large Stable Companies
Use a minimum market capitalization you feel comfortable with. I’ve seen recommendations from $500 million to 2 billion (what ModernGraham uses in their analysis).
2. Strong Financial Statements
a. Current assets twice current liabilities (Current Ratio > 2).
b. Working capital greater than long term debt.
3. Positive Earnings
No losses in the last 10 years.
4. Dependable Dividends
At least 20 consecutive years of dividend payments.
5. Growing Earnings
At least 33% increase in Earning Per Share (EPS) over 10 years.
6. Moderate Price / Earnings Ratio (P/E)
Three year average earnings should be less than 15 times the price.
7. Low Price to Book Value
Price / Book Value should be less than 1.5.