Is This Financial Company Cheap According to Graham?

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Earlier this year, I spent some time dissecting Benjamin Graham's The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a means of valuation when it comes to stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally take the square root. The result, in dollars, is the Graham number.

However, a quick check can help determine whether or not a company might be worthy of a look using the teachings of Graham. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15 and P/B of 1.5. With that in mind, I looked at the stocks of the S&P 500 that met the ideal situation mentioned above. Currently, there are 68 companies in the index that meet these criteria. I will be making a CAPScall on these companies after comparing them to competitors and their current value in relation to their Graham numbers. Up next is financial services company Ameriprise Financial (NYSE: AMP  ) .

Who are they?
Ameriprise has been around in various forms since 1894, but its current public version arose out of a spin-off from American Express (NYSE: AXP  ) in 2005. Currently, the company has over $650 billion in assets under management, and boasts that more people come to them for financial advice than any other company.

Like most spin-offs, Ameriprise was successful as a stock pretty much from the beginning, checking in with an annualized return of 9.1% since its initial day on the market on October 3, 2005. Ken Fisher, billionaire owner-investor at Fisher Investments, owns over 500,000 shares of the company, marking the stock as a potential value buy. Along with a 2.5% dividend yield, it may be a great option in the crowded financial services industry.

What's it worth?
When compared to other similarly sized financial companies, Ameriprise is only exceeded by one company and has a bit of upside at its current price:


EPS (ttm)

Book Value Per Share (mrq)

Graham Number

Recent Price


Ameriprise Financial $4.22 $42.34 $63.40 $56.47 12.3%
Principle Financial Group (NYSE: PFG  ) $2.15 $31.88 $39.27 $28.31 38.7%
Invesco Ltd. (NYSE: IVZ  ) $1.56 $18.34 $25.37 $25.01 1.4%

Source: Yahoo! Finance and author's calculations.

Both Principle Financial Group and Invesco could be feeling the pinch felt by a lot of asset management companies in this low interest rate environment, but it hasn't prevented them from both trading at discounts to its Graham valuation. However, this hasn't prevented either company from out-yielding Ameriprise, with PFG near 3% and Invesco at close to 2.8%.

Accountability time
A stock's valuation, regardless of the method used, is but one thing to look at when evaluating a potential investment. With room to grow into its Graham number valuation, I will be placing a "thumbs up" over on my CAPS page in order to track this call and keep myself accountable. I will also be adding Ameriprise Financial to My Watchlist to stay up to date on anything that may cause me to change my opinion of the company.

If you are looking to find other companies to add to your retirement portfolio, be sure to pick up a copy of our free special report "3 Stocks That Will Help You Retire Rich" featuring a company mentioned in this article. Click here to get your copy while it's still available.

Fool contributor Robert Eberhard holds no position in any company mentioned. Follow him on Twitter, or click here to see his holdings and a short bio. Motley Fool newsletter services have recommended creating a write covered strangle position in American Express. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Related Tickers

10/21/2016 10:45 AM
AMP $97.65 Down -0.20 -0.20%
Ameriprise Financi… CAPS Rating: ***
AXP $67.23 Up +0.45 +0.67%
American Express CAPS Rating: ****
IVZ $29.88 Up +0.06 +0.20%
Invesco CAPS Rating: *****
PFG $52.60 Down -0.20 -0.38%
Principal Financia… CAPS Rating: *****