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).
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.
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.
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.
Customized Value Investing.