Benjamin Graham, Public-Utilities and Financial Enterprises

Benjamin Graham — Warren Buffett's mentor and founder of Value Investing — wrote thus on the subject of analyzing Utilities and Financials.

1. Adequate Size of the Enterprise - not less than $50 million of total assets for a public utility.
Note: About $250 million of total assets today, when adjusted for inflation.
2. A Sufficiently Strong Financial Condition - For public utilities the debt should not exceed twice the stock equity (at book value).
Chapter 14: Stock Selection for the Defensive Investor, The Intelligent Investor.
The Public-Utility “Solution”
We exclude one criterion from our tests of public-utility stocks—namely, the ratio of current assets to current liabilities. The working-capital factor takes care of itself in this industry as part of the continuous financing of its growth by sales of bonds and shares. We do require an adequate proportion of stock capital to debt.
Chapter 14: Stock Selection for the Defensive Investor, The Intelligent Investor.
Investing in Stocks of Financial Enterprises
We have no very helpful remarks to offer in this broad area of investment—other than to counsel that the same arithmetical standards for price in relation to earnings and book value be applied to the choice of companies in these groups as we have suggested for industrial and public-utility investments.
Chapter 14: Stock Selection for the Defensive Investor, The Intelligent Investor.

Serenity's Classic Graham Screener follows Graham's standard 17-point investment framework.

The Advanced Graham Screener has additional filters for Total Assets and Equity÷Debt. These filters — when used in combination with the other Graham criteria — allow for the screening of Public-Utilities and Financial Enterprises.

A Sample Screening of Utilities and Financials

The Total Assets and Equity÷Debt filters are used here — instead of Sales / Size, Assets | Liabilities and Assets | Debt — to screen for Utilities and Financials, just as Graham recommended.

The filters used here are:

Earnings Stability: 100%
Dividend Record: 100%
Earnings Growth: 100%
Graham Number(%): 100%
Total Assets: 250
Equity ÷ Debt: 50%
Source (Analyzed by): Serenity

Adjusting For Current Bond Yields

Considering today's bond yields, a Graham Number(%) of 70% would be sufficient for the stock to clear Graham's criteria.

Utilities and Financials for Enterprising Investors

The above example is based on Graham's own instructions for adjusting the Defensive criteria for Utilities and Financials.

The Total Assets and Equity÷Debt filters could also be used — instead of Assets | Liabilities and Assets | Debt — to similarly adjust Graham's criteria for Enterprising grade stocks, even though this was not specifically mentioned by Graham.

Advanced Graham Screener

Customized Value Investing.


Hello,I've been searching a month which formula should I use to test the public utilities for their financial condition. The sentence 'the debt should not exceed twice the stock equity (at book value)' is whether just pasted without explanation or said to be ambiguous. What exactly is 'debt'? 'Short-Term Debt'? 'Long-term Debt'? (the only two values containing the term 'debt' within the gurufocus definitions section). And what about 'book value': 'Tangible Book Value' or simply 'book value'? I ended up building the following formula: 0 ≤ Total Liabilities/ (Total Assets - Intangible Assets - Total Liabilities) ≤ 2 but I have doubts... I have just the feeling that no one understand it and everybody is avoiding the problem....Could you please help me to solve the problem?

serenity's picture

Hello Francesca,

Graham always uses specific terms such as net tangible assets, Long-term debt etc wherever applicable. So it should be safe to assume that Graham means Book Value and Total Liabilities here.

The Equity÷Debt rating on Serenity uses:
(Total Assets - Total Liabilities) ÷ Total Liabilities

So for a Public Utility to qualify as Defensive, it would need to have:
Equity÷Debt > 50%

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